SEC Filing - MediciNova, Inc.

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Form S-1

As filed with the U.S. Securities and Exchange Commission on September 30, 2004

Registration No. 333-

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

MediciNova, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

2834

33-0927979

(State or other jurisdiction of

incorporation or organization)

(Primary standard industrial classification
code number)

(IRS employer

identification no.)

4350 La Jolla Village Drive, Suite 950

San Diego, CA 92122

(858) 373-1500

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Takashi Kiyoizumi, M.D., Ph.D.

MediciNova, Inc.

President and Chief Executive Officer

4350 La Jolla Village Drive, Suite 950

San Diego, CA 92122

(858) 373-1500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Babak Yaghmaie, Esq.

Pillsbury Winthrop LLP

1540 Broadway

New York, New York 10036

Phone: (212) 858-1000

Fax: (212) 858-1500

David R. Snyder, Esq.

James E. Basta, Esq.

Pillsbury Winthrop LLP

101 West Broadway

San Diego, California 92101-4700

Phone: (619) 234-5000

Fax: (619) 236-1995

Alan G. Cannon, Esq.

Simpson Thacher & Bartlett LLP

Ark Mori Building—30^th Floor

12-32, Akasaka 1-chome

Minato-ku, Tokyo 107, Japan

Phone: 011-81-3-5562-8601

Fax: 011-81-3-5562-8606

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ¨


Title of Each Class of Securities to be Registered	Proposed Maximum Aggregate Offering Price⁽¹⁾		Amount of Registration Fee
Common Stock, par value $0.001 per share	$	100,000,000	$	12,670

(1)	Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS (Subject to Completion)

Dated September 30, 2004.

Shares

LOGO

Common Stock

We are selling shares of common stock. These shares will be offered in Japan and to investors located in jurisdictions other than the United States. We have applied to list our common stock on the Mothers Market of the Tokyo Stock Exchange. This is an initial public offering of our common stock. Prior to this offering, there has been no public market for our common stock. See “Underwriting” for a discussion of the factors considered in determining the initial public offering price. We currently estimate that the initial public offering price of our common stock will be between $ and $ per share.

Our business and an investment in our common stock involve significant risks. These risks are described under the caption “ Risk Factors” beginning on page 7 of this prospectus.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.


	Per Share	Total
Public offering price	$	$
Underwriting discount and commissions	$	$
Proceeds, before expenses, to us	$	$

The underwriters also may purchase up to shares of our common stock from us at the public offering price, less the underwriting discounts and commissions, to cover over-allotments.

The underwriters expect to deliver the shares against payment in dollars through the facilities of the Japan Securities Settlement & Custody, Inc. on or about , 2005.

Daiwa Securities SMBC

The date of this prospectus is , 2005

TABLE OF CONTENTS


		Page
Prospectus Summary		1
Risk Factors		7
Information Regarding Forward-Looking Statements		23
Use of Proceeds		24
Dividend Policy		24
Capitalization		25
Dilution		26
Selected Financial Data		27
Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Business		33


		Page
Management		49
Related-Party Transactions		59
Principal Stockholders		61
Description of Capital Stock		63
Shares Eligible for Future Sale		67
Tax Matters		71
Underwriting		75
Legal Matters		77
Experts		77
Where You Can Find More Information		77
Medicinova, Inc. Index to Financial Statements		F-1

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. You should assume we are offering to sell, and seeking offers to buy, the shares of common stock offered by this prospectus only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

Neither we nor the underwriter have taken, or will take any action in any jurisdiction other than Japan and the United States of America that would permit a public offering of the shares or possession of the distribution of a prospectus in any jurisdiction where action for that purpose is required. No person has been authorized to give any information or to make any representation other than those contained in this prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized.

PROSPECTUS SUMMARY

The information contained in this summary is qualified in its entirety by, and should be read in conjunction with, the detailed information and financial statements, including the notes thereto, appearing elsewhere in this prospectus. You should read the following summary together with the more detailed information, including “Risk Factors” and our financial statements and related notes, before making your investment decision.

Our Business

We are a specialty pharmaceutical company focused on acquiring, developing and commercializing innovative pharmaceutical products for a variety of diseases and conditions. We actively seek to identify and acquire license rights to product candidates with extensive safety and efficacy data that are in late pre-clinical or early clinical development and address large markets with significant opportunities for improved therapies. We currently have one Phase I clinical trial ongoing for a product candidate and anticipate entering into Phase II clinical trials with four other product candidates by the end of the first half of 2005.

Our development programs follow a dual pathway:

•

strategic core programs; and

•

partnering programs.

Our strategic core programs consist of product candidates we intend to retain the rights to through final regulatory approval in the United States and commercialize directly. Currently, our strategic core programs are focused on the urology and obstetrics/gynecology markets. These are markets in which we believe we can pursue regulatory approval and develop a marketing and sales infrastructure in the United States utilizing our own resources and without partnering with larger pharmaceutical companies. Our existing strategic core programs consist of:

•

MN-221 for the treatment of premature labor, for which we intend to file an Investigational New Drug application, or IND, to permit commencement of Phase II clinical trials in the first half of 2005;

•

MN-029 for the treatment of solid tumors, currently in Phase I clinical trials; and

•

MN-001 for the treatment of interstitial cystitis, for which we intend to file an IND application to permit commencement of Phase II clinical trials by the end of the first quarter of 2005.

Our partnering programs consist of product candidates we intend to license to larger pharmaceutical companies after advancing them through Phase II clinical trials and with respect to which we intend to retain co-promotion rights. Our partnering programs focus on product candidates for larger markets that typically require significantly greater clinical development and commercialization resources than our strategic core programs. Our partnering programs are currently focused on asthma and anxiety and consist of:

•

MN-001 for the treatment of bronchial asthma, currently anticipated to enter a Phase II clinical trial by the end of 2004; and

•

MN-305 for the treatment of anxiety, for which we intend to commence a Phase II clinical trial by the end of the first quarter of 2005.

We believe that our dual pathway approach to product development will allow us:

•

to significantly diversify our development risks by enabling us to acquire a larger portfolio of product candidates;

•

to move more quickly into the clinical development process in the United States; and

•

to generate near-term revenue opportunities through our partnering program, as well as to generate long-term sustained revenue opportunities through our strategic core programs.

To date, we have acquired license rights to four compounds. We intend to continue to build a strong product pipeline by establishing relationships with large and mid-sized North American, European and Japanese biotechnology and pharmaceutical companies. Since our inception, we have established relationships with a number of pharmaceutical companies, including Kissei Pharmaceutical, Kyorin Pharmaceutical and Mitsubishi Pharma Corporation, pursuant to which we have obtained rights to develop and market compounds. We believe the establishment of these relationships in Japan provides us with a competitive advantage in identifying and acquiring compounds from Japanese pharmaceutical companies.

We have assembled a management team with extensive experience in the pharmaceutical and biotechnology industry, including experience in pre-clinical research, drug substance and product preparation, regulatory affairs, clinical research, marketing and sales and corporate development.

Our Strategy

Our goal is to become a leader in the development and commercialization of drugs for the treatment of diseases with unmet medical needs. Key elements of our strategy are to:

•

execute our dual pathway development approach;

•

continue to expand our pipeline of promising product candidates;

•

partner selectively with larger pharmaceutical companies to maximize the commercial potential of our product candidates; and

•

continue to strengthen our management team.

Our History

We were founded in September 2000 by Takashi Kiyoizumi, M.D., Ph.D. and Yuichi Iwaki, M.D., Ph.D. as a majority-owned subsidiary of the Japanese pharmaceutical company, Tanabe Seiyaku Co., Ltd. Prior to joining our company, Dr. Kiyoizumi had been the chief executive of Tanabe Research Laboratories, USA, the San Diego-based research arm of Tanabe Seiyaku. Our operations are now completely independent of Tanabe Seiyaku, which, as of September 30, 2004, indirectly owned approximately 15% of our outstanding capital stock.

Our principal executive offices are located at 4350 La Jolla Village Drive, Suite 950, San Diego, California 92122, and our telephone number is (858) 373-1500. Our website address is www.medicinova.com. The information on our website is not a part of this prospectus. References in this prospectus to “we,” “our,” “us” and “MediciNova” refer to MediciNova, Inc., a Delaware corporation.

We have received U.S. and Japanese trademark registration for our corporate name, MediciNova. All other trademarks and trade names referred to in this prospectus are the property of their respective owners.

Risks Affecting Our Business

Our business is subject to numerous risks, which are highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. In particular, we are an early-stage company with a limited operating history and limited revenues derived from operations. We have incurred significant losses since our inception. For the year ended December 31, 2003, we had a net loss of $6.2 million. For the six months ended June 30, 2004, we had a net loss of $26.7 million, including a $19.4 million non-cash stock-based compensation charge. As of June 30, 2004, we had an accumulated deficit of $41.8 million. We anticipate that these losses will continue for the next several years. We do not have any products that are approved for sale. If we are unsuccessful in developing and gaining regulatory approval for new product candidates, we may not be able to sustain our operations and may never become profitable. We may need additional financing to execute our strategy to acquire, develop or commercialize our current and future product candidates.

The Offering

Common stock offered by MediciNova, Inc.

shares to be offered by means of a public offering in Japan.

Lead underwriter

Daiwa Securities SMBC Co. Ltd.

Over-allotment Option

We have granted the underwriters an option, exercisable until , 2005, to purchase up to additional shares, solely to cover over-allotments, if any.

Offering Price

$ per share.

Listing

We intend to apply to the Mothers Market of the Tokyo Stock Exchange for listing of our common stock.

Common stock to be outstanding after this offering

shares.

Use of Proceeds

We expect to use the net proceeds of this offering to continue the development and prepare for the commercialization of our product candidates and for other working capital and general corporate purposes. In addition, we may use some of the net proceeds to in-license additional product candidates. See “Use of Proceeds.”

Lock-Up Agreements

We, our officers, directors, existing stockholders, option holders and warrantholders have agreed with the underwriters not to dispose of or hedge our common stock for a period of 180 days after the listing of our common stock on the Mothers Market, subject to limited exceptions described in “Underwriting.”

Payment and Settlement

The underwriters expect to deliver certificates representing the shares against payment in dollars through the facilities of the Japan Securities Settlement & Custody, Inc. on or about , 2005.

Expected Timetable

We expect the timetable for the offering to be as follows (dates subject to change):

, 2005: Commencement of bookbuilding of the offering in Japan.

, 2005 to , 2005: Pricing of the offering.

First to third business day after pricing date: Japanese subscription period.

Seventh business day after pricing date: Listing of the common stock on the Mothers Market of the Tokyo Stock Exchange and delivery of shares.

The number of shares of common stock to be outstanding immediately after this offering is based on 67,282,856 shares of common stock outstanding as of September 30, 2004. This number excludes:

•

1,510,000 shares of our common stock issuable upon exercise of options outstanding under our 2000 General Stock Incentive Plan as of September 30, 2004 at an exercise price of $1.00 per share;

•

shares available for future issuance under our 2004 Stock Incentive Plan following the date of this offering; and

•

13,356,572 shares of our common stock issuable upon exercise of Stock Purchase Warrants, at a weighted average exercise price of $0.13 per share.

Unless otherwise stated, information in this prospectus is based on the following assumptions:

•

the conversion of all outstanding shares of our convertible preferred stock into 66,782,856 shares of common stock immediately prior to the closing of this offering;

•

the adoption of our restated certificate of incorporation and amended and restated bylaws to be effective upon the closing of this offering; and

•

no exercise of the underwriters’ over-allotment option.

Summary Financial Data

The following table sets forth certain of our financial data. We derived the summary financial data for the years ended December 31, 2001, 2002 and 2003 from our audited financial statements included elsewhere in this prospectus. We have also included data for the six months ended June 30, 2003 and 2004 and the period from September 26, 2000 (inception) to June 30, 2004 from our unaudited financial statements included elsewhere in this prospectus and data for the period from September 26, 2000 (inception) to December 31, 2000 from our audited financial statements not included in this prospectus. You should read this data together with our financial statements and related notes and the information under “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The pro forma information contained in the balance sheet data gives effect to the issuance of 27,667,856 shares of common stock upon the conversion of the Series C preferred stock sold in a recent private financing. The pro forma as adjusted balance sheet data reflects the pro forma balance sheet data at June 30, 2004 adjusted for the sale of shares of our common stock in this offering at the initial offering price to the public of $ per share, after deducting the estimated underwriting discounts, commissions and offering expenses payable by us and the automatic conversion of all preferred stock into common stock upon the completion of this offering.


	Period from September 26, 2000 (inception) to December 31, 2000			Years ended December 31,									Six months ended June 30,						Period from September 26, 2000 (inception) to June 30, 2004
				2001			2002			2003			2003			2004
	(in thousands, except share and per share data)
Statements of Operations Data:
Revenues	$	—		$	—		$	—		$	—		$	—		$	187		$	187
Cost of revenues		—			—			—			—			—			166			166

Gross profit		—			—			—			—			—			21			21
Operating expenses:
Research and development		272			952			5,551			4,723			2,229			6,108			17,606
General and administrative		—			1,063			1,462			1,538			707			1,224			5,286
Amortization of employee stock-based compensation:
Research and development		—			—			—			—			—			14			14
General and administration		—			—			—			—			—			10			10
Stock-based compensation related to founders’ warrants		—			—			—			—			—			19,406			19,406

Total operating expenses		272			2,015			7,013			6,261			2,936			26,762			42,322

Operating loss		(272	)		(2,015	)		(7,013	)		(6,261	)		(2,936	)		(26,741	)		(42,301	)
Other income, net		71			220			82			52			24			44			468

Net loss	$	(201	)	$	(1,795	)	$	(6,931	)	$	(6,209	)	$	(2,912	)	$	(26,697	)	$	(41,833	)

Basic and diluted net loss per share⁽¹⁾	$	(0.40	)	$	(3.59	)	$	(13.86	)	$	(12.42	)	$	(5.82	)	$	(53.39	)

Shares used to compute basic and diluted net loss per share⁽¹⁾		500,000			500,000			500,000			500,000			500,000			500,000

Pro forma net loss per common share assuming conversion of preferred stock, basic and diluted⁽¹⁾										$	(0.37	)				$	(0.96	)

Shares used in computing pro forma net loss per common share assuming conversion of preferred stock, basic and diluted⁽¹⁾											16,778,767						27,946,401

(1)	See Note 1 to our financial statements for an explanation of the method used to calculate the historical and pro forma net loss per share and the number of shares used in the computation of the per share amounts.

(2)	As disclosed in Note 9 to our financial statements, in connection with the sale of Series C preferred stock, we will record in the third quarter of 2004 a deemed dividend of $31.3 million and a stock-based compensation charge of $14.7 million.


	As of June 30, 2004
	(in thousands)
	Actual			Pro Forma			Pro Forma As Adjusted
Balance Sheet Data:
Cash, cash equivalents and marketable securities available-for-sale	$	15,191		$	58,622		$
Working capital		14,291			57,722
Total assets		15,632			59,063
Redeemable convertible preferred stock		—			43,431
Deficit accumulated during the development stage		(41,833	)		(41,833	)
Total stockholders’ equity		14,459			14,459

RISK FACTORS

An investment in our common stock involves significant risks. You should consider carefully the risks described below and the other information included in this prospectus, including our financial statements and related notes, before you decide to buy our common stock. Our business, financial condition and results of operation could be harmed by any of the following risks. The trading price of our common stock could decline due to any of these risks, and you could lose part or all of your investment.

Risks Related to Our Business

We expect our net losses to continue for at least several years and we are unable to predict the extent of our future losses.

We are a development stage specialty pharmaceutical company with a limited operating history. We have incurred significant net losses since our inception. For the year ended December 31, 2003, we had a net loss of $6.2 million. For the six months ended June 30, 2004, we had a net loss of $26.7 million, including a $19.4 million non-cash stock-based compensation charge. We expect our annual net losses to increase over the next several years as we expand and incur significant clinical development costs. These losses, excluding the portion related to stock-based compensation, have reduced and will continue to reduce our stockholders’ equity and working capital.

We expect our development expenses to increase in connection with our planned clinical trials for our product candidates and any other development projects that we may initiate. In addition, we expect to incur increased general and administrative expenses as well as the increased costs to operate as a public company. Consequently, we expect to continue to incur significant and increasing operating losses for the foreseeable future.

Unless we are able to generate sufficient product revenue, we will continue to incur losses from operations and may never become profitable.

We have not received, and do not expect to receive for at least the next several years, any revenues from the commercialization of our product candidates. To date, we have not generated any product revenue and have funded our operations primarily from private sales of our securities. Our only source of revenues in the first six months of 2004 was from our performance of development management services. In 2003, we received no revenues. We anticipate that, prior to our commercialization of a product candidate, strategic collaboration fees and out-licensing upfront and milestone payments will be our primary source of revenues. To obtain revenues from sales of our product candidates, we must succeed, either alone or with third parties, in developing, obtaining regulatory approval for, and manufacturing and marketing drugs with market potential. We may never succeed in these activities, and may never generate revenues that are significant enough to achieve profitability.

If we fail to develop and commercialize a therapeutic drug successfully, we may not generate sufficient revenues to continue our business operations.

We currently have no products that have received regulatory approval for commercial sale. The process to develop, obtain regulatory approval for and commercialize potential product candidates is long, complex and costly. All of our product candidates are in clinical development. In addition, we have limited internal discovery capabilities and rely on our ability to license or acquire additional product candidates. Consequently, our business is substantially dependent on our ability to complete development, obtain regulatory approval for and successfully commercialize our product candidates in a timely manner.

The loss of any rights to develop and market any of our product candidates would significantly impair our operating results.

We license the rights to develop and market our product candidates. We are obligated to develop and commercialize those product candidates in accordance with mutually agreed upon terms and conditions. Our ability

to satisfy some or all of the terms and conditions of our licensing arrangements is dependent on numerous factors, including some factors that are outside of our control. Our licensing arrangements may be terminated if we materially breach our obligations under the agreements and fail to cure a breach within a specified period of time.

If any of our license agreements is terminated, then we would have no further rights to develop and commercialize the product candidate which is the subject of the license. The termination of any of our license agreements would significantly and adversely affect our business.

If we fail to identify and license or acquire other product candidates, we will not be able to expand our business.

One of our key strategies is to license or acquire clinical-stage product candidates and further develop them for commercialization. The success of this strategy depends upon our ability to identify, select and acquire the right product candidates. Identifying, negotiating and implementing an economically viable product candidate acquisition or license is a lengthy and complex process. Moreover, the market for licensing and acquiring product candidates is intensely competitive and many of our competitors have greater resources than us. If we are not successful in identifying and licensing or acquiring other product candidates, we will not be able to grow our revenues with sales from new products.

Our product candidates must undergo clinical trials, which are long, expensive and unpredictable, and there is a high risk of failure.

Clinical trials are long, expensive and unpredictable. It may take several years to complete the clinical development necessary to commercialize a drug, and delays or failure can occur at any stage which may result in our inability to market and sell products derived from our product candidates and to generate product revenues. Of the large number of drugs in development, only a small percentage result in the submission of a new drug application to the Food and Drug Administration, or FDA, and even fewer are approved for commercialization. Interim results of clinical trials do not necessarily predict final results, and success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials even after promising results in earlier trials.

All of our product candidates are at an early stage of development and the historical rate of failure for early-stage product candidates is extremely high. To date, the FDA has accepted Investigational New Drug, or IND, applications for only two of our five product candidates. We cannot conduct human clinical trials in the United States on our other three product candidates until an IND application is in effect and there can be no assurance that the FDA will allow our applications to go into effect.

In connection with clinical trials, we face risks that:

•

a product candidate may not prove to be efficacious;

•

patients may die or suffer other adverse effects for reasons that may or may not be related to the product candidate being tested;

•

the results may not confirm the positive results of earlier trials; and

•

the results may not be acceptable to the FDA or other regulatory agencies.

Delays, suspensions and terminations in our clinical trials could result in increased costs to us and delay our ability to generate product revenues.

The commencement of clinical trials can be delayed for a variety of reasons, including delays in:

•

demonstrating sufficient safety to persuade regulatory authorities to allow a clinical trial to begin;

•

reaching agreement on acceptable terms with prospective contract research organizations and clinical trial sites;

•

manufacturing sufficient quantities of a product candidate;

•

obtaining institutional review board approval to conduct a clinical trial at a prospective site; and

•

obtaining sufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease and the eligibility criteria for the clinical trial.

Once a clinical trial has begun, it may be delayed, suspended or terminated due to a number of factors, including:

•

ongoing discussions with regulatory authorities regarding the scope or design of our clinical trials or requests by them for supplemental information with respect to our clinical trial results;

•

failure to conduct clinical trials in accordance with regulatory requirements;

•

lower than anticipated retention rates of patients in clinical trials;

•

serious adverse events or side effects experienced by participants; or

•

insufficient supply or deficient quality of product candidates or other materials necessary for the conduct of our clinical trials.

Many of these factors described above may also ultimately lead to denial of regulatory approval of a current or potential product candidate. If we experience delays in our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed.

If we fail to obtain the capital necessary to fund our operations, we will be unable to develop and commercialize our product candidates.

We have consumed substantial amounts of capital since our inception. From our inception to June 30, 2004, we used $21.7 million in cash to fund our operating activities and acquisitions of property and equipment. Although we believe our existing cash resources plus the proceeds of this offering will be sufficient to fund our anticipated cash requirements through 2006, we will require significant additional financing in the future to fund our operations. Our future capital requirements will depend on, and could increase significantly as a result of, many factors, including:

•

progress in, and the costs of, our clinical trials;

•

the costs of securing manufacturing arrangements for clinical or commercial production;

•

the costs involved in filing, prosecuting, enforcing and defending patent claims and other intellectual property rights; and

•

the costs of establishing or contracting for sales and marketing capabilities if we obtain regulatory clearances to market our product candidates.

Until we can generate significant continuing revenues, we expect to satisfy our future cash needs through strategic collaborations, private or public sales of our securities, debt financings or by licensing all or a portion of our product candidates. Strategic collaborations, future debt and equity financings and licensing transactions may significantly dilute existing stockholders or limit our rights to our product candidates. We cannot be certain that additional sources of capital will be available to us on acceptable terms, or at all. If sources of capital are not available, we may not be in a position to pursue other business opportunities that require financial commitments and we may be required to:

•

terminate or delay clinical trials for one or more of our product candidates;

•

delay establishing sales and marketing capabilities;

•

curtail our efforts to acquire new product candidates; or

•

relinquish rights to our technologies or product candidates.

We will depend on strategic collaborations with third parties to develop and commercialize selected product candidates and will not have control over a number of key elements relating to the development and commercialization of these product candidates.

A key aspect of our strategy is to selectively enter into collaborations with third-party partners. We may rely on our partners for financial resources and for development, commercialization and regulatory expertise with respect to selected product candidates.

Our partners may fail to develop or effectively commercialize products using our product candidates because they:

•

do not have sufficient resources or decide not to devote the necessary resources due to internal constraints such as limited cash or human resources;

•

decide to pursue a competitive potential product that has been developed outside of the collaboration; or

•

cannot obtain the necessary regulatory approvals.

We may not be able to enter into collaborations on acceptable terms, if at all. We also face competition in our search for partners with whom we may collaborate.

We rely on third parties to conduct our clinical trials and perform data collection and analysis, which may result in costs and delays that prevent us from successfully commercializing product candidates.

Although we design and manage our current clinical trials, we do not have the ability to conduct clinical trials directly for our product candidates. We will rely on contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct our clinical trials and to perform data collection and analysis.

Our clinical trials may be delayed, suspended or terminated if:

•

the third parties upon whom we rely do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines;

•

these third parties need to be replaced; or

•

the quality or accuracy of the data obtained by the third parties is compromised due to their failure to adhere to our clinical protocols or regulatory requirements or for other reasons.

Failure to perform by the third parties upon whom we rely may increase our development costs, delay our ability to obtain regulatory approval and prevent the commercialization of our product candidates. While we believe that there are numerous alternative sources to provide these services, in the event that we seek such alternative sources, we may not be able to enter into replacement arrangements without delays or additional expenditures.

Even if we successfully complete the clinical trials of our product candidates, they may fail for other reasons.

Even if we successfully complete the clinical trials of our product candidates, they may fail for other reasons, including the possibility that the product candidates will:

•

fail to provide acceptable evidence of safety and efficacy;

•

fail to receive the regulatory approvals required to market them as drugs;

•

fail to compete with product candidates or other treatments commercialized by our competitors;

•

be subject to proprietary rights held by others requiring the negotiation of a license agreement prior to marketing; or

•

be difficult or expensive to manufacture on a commercial scale.

Our product candidates may not gain acceptance among physicians, patients and the medical community, thereby limiting our potential to generate revenues.

Even if our product candidates are approved for commercial sale by the FDA or other regulatory authorities, the degree of market acceptance of any approved product candidate by physicians, healthcare professionals and third-party payors and our profitability and growth will depend on a number of factors, including:

•

relative convenience and ease of administration;

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the prevalence and severity of any adverse side effects;

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availability of alternative treatments;

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pricing and cost effectiveness, which may be subject to regulatory control;

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effectiveness of our or any of our partners’ sales and marketing strategy; and

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our ability to obtain sufficient third-party insurance coverage or reimbursement.

If any product candidate that we develop does not provide a treatment regimen that is as beneficial as the current standard of care or otherwise does not provide patient benefit, that product likely will not achieve market acceptance.

If we are unable to attract, retain and motivate key management and scientific staff, our drug development programs may be delayed and we may be unable to successfully develop or commercialize our product candidates.

Our success depends on our ability to attract, retain and motivate highly qualified management and scientific personnel. In particular, our drug development programs depend on our ability to attract and retain highly experienced development and regulatory personnel. In addition, we will need to hire additional personnel as we continue to expand our clinical development and other development activities. We face competition for experienced scientists and other technical and professional personnel from numerous companies and academic and other research institutions. Competition for qualified personnel is particularly intense in the San Diego, California area. Failure to attract and retain the necessary personnel could significantly impede the achievement of our development and commercialization objectives.

Although we have employment agreements with key members of management, each of our employees, subject to applicable notice requirements, may terminate his or her employment at any time. We do not carry “key person” insurance covering members of senior management. If we lose any of our key management personnel, we may not be able to find suitable replacements and our business would be harmed as a result. In particular, we have relied on the skills and relationships of our founders, Dr. Yuichi Iwaki and Dr. Takashi Kiyoizumi, in licensing product candidates from Japanese pharmaceutical companies and securing financing from Japanese institutions.

If we are unable to establish our sales and distribution capabilities, we will be unable to successfully commercialize our core product candidates.

To date, we have not sold, marketed or distributed any pharmaceutical products. If we are successful in developing and obtaining regulatory approvals for the product candidates in our strategic core programs, we will

need to establish sales, marketing and distribution capabilities. Developing an effective sales and marketing force will require a significant amount of our financial resources and time. We may be unable to establish and manage an effective sales force in a timely or cost-effective manner, if at all, and any sales force we do establish may not be capable of generating demand for our products. Although we intend to establish strategic collaborations to market the products in our strategic core programs outside the United States, if we are unable to establish such collaborations, we may be required to market our strategic core product candidates outside of the United States directly. In that event, we may need to build a corresponding international sales and marketing capability with technical expertise and with supporting distribution capabilities.

We may not be able to continue to exploit the services of outside scientific and clinical advisors fully, which could impair the progress of our clinical trials and our research and development efforts.

We work with scientific and clinical advisors at academic and other institutions who are experts in the fields related to each of our drug development projects. They advise us with respect to our clinical trials. These advisors are not our employees and may have other commitments that would limit their future availability to us. Although our scientific and clinical advisors generally agree not to engage in competing work, if a conflict of interest arises between their work for us and their work for another entity, we may lose their services, which may impair our reputation in the industry and delay the clinical development of our product candidates.

We will need to increase the size of our organization, and we may encounter difficulties managing our growth, which could adversely affect our results of operations.

We will need to expand and effectively manage our operations and facilities in order to advance our drug development programs, achieve milestones under our collaboration agreements, facilitate additional collaborations and pursue other development activities. It is possible that our human resources and infrastructure may be inadequate to support our future growth. To manage our growth, we will be required to continue to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. Meeting our public reporting obligations and other regulatory requirements in the United States and Japan following this offering will place additional demands on our limited resources. In addition, we will have to develop sales, marketing and distribution capabilities for the product candidates in our strategic core programs. We may not successfully manage the expansion of our operations and, accordingly, may not achieve our development and commercialization goals.

We expect that our results of operations will fluctuate, which may make it difficult to predict our future performance from period to period.

Our quarterly operating results have fluctuated in the past and are likely to continue to do so in the future. Some of the factors that could cause our operating results to fluctuate from period to period include:

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the status of development of our product candidates and, particularly, the timing of any milestone payments to be paid or received by us under our licensing agreements;

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the incurrence of clinical expenses that could fluctuate significantly from period to period;

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the unpredictable effects of collaborations during these periods;

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the timing of our satisfaction of applicable regulatory requirements;

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the rate of expansion of our clinical development and other internal development efforts;

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the effect of competing technologies and products and market developments; and

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general and industry-specific economic conditions.

We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

Relying on third-party manufacturers may result in delays in our clinical trials and product introductions as well as increased costs.

We have no manufacturing facilities. We do not intend to develop facilities for the manufacture of product candidates for clinical trials or commercial purposes in the foreseeable future. We are contracting with third-party manufacturers to produce, in collaboration with us, our product candidates for clinical trials. While we believe that there are competitive sources available to manufacture our product candidates, we may not be able to enter into arrangements without delays or additional expenditures. We cannot estimate these delays or costs with certainty.

Our manufacturers will be obliged to operate in accordance with FDA-mandated current good manufacturing practices, or cGMPs. A failure of any of our contract manufacturers to establish and follow cGMPs and to document their adherence to such practices may lead to significant delays in clinical trials or in obtaining regulatory approval of product candidates or the ultimate launch of our products into the market. In addition, changing contract manufacturers is difficult. For example, doing so requires re-validation of the manufacturing processes and procedures in accordance with FDA-mandated cGMPs, which may be costly and time-consuming. Failure by our third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of the government to grant pre-market approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions.

We may not be able to manufacture our product candidates in commercial quantities, which would prevent us from commercializing our product candidates.

To date, our product candidates have been manufactured in small quantities for pre-clinical and clinical trials. If any of these product candidates are approved by the FDA or other regulatory agencies for commercial sale, we will need to manufacture them in larger quantities. We may not be able to successfully increase the manufacturing capacity, whether in collaboration with third-party manufacturers or on our own, for any of our product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve. If we are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage in supply. Our product candidates will require precise, high quality manufacturing. Our failure to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could result in a material adverse effect on our business, financial condition and results of operations.

Materials necessary to manufacture our products may not be available on commercially reasonable terms, or at all, which may delay the development and commercialization of our products.

There are a limited number of suppliers of the materials necessary to produce our compounds. The manufacturers for our products will need to purchase these materials for our clinical trials and for commercial distribution if we obtain marketing approval for any of our products. Suppliers may not sell us these materials at the time we need them or on commercially reasonable terms. If our manufacturers are unable to obtain these materials for our clinical trials, product testing and potential regulatory approval of our products would be delayed, significantly impacting our ability to develop the product candidate. If our manufacturers or we are unable to purchase these materials after regulatory approval has been obtained for our products, the commercial launch of our products would be delayed or there would be a shortage in supply of our products, which would materially affect our ability to generate revenues from the sale of our products.

If we engage in any acquisition, we will incur a variety of costs and may never realize the anticipated benefits of the acquisition.

We may attempt to acquire businesses, technologies, services or products or in-license technologies that we believe are a strategic fit with our business. We have limited experience in identifying acquisition targets, successfully completing proposed acquisitions and integrating any acquired businesses, technologies, services or products into our current infrastructure. The process of integrating any acquired business, technology, service or product may result in unforeseen operating difficulties and expenditures any may divert significant management attention from our ongoing business operations. As a result, we will incur a variety of costs in connection with an acquisition and may never realize its anticipated benefits.

Risks Related to Our Intellectual Property

Our ability to compete may decline if we do not adequately protect our proprietary rights.

Our commercial success depends on obtaining and maintaining proprietary rights to our product candidates and technologies and their uses, as well as successfully defending these rights against third-party challenges. We will only be able to protect our product candidates, proprietary technologies and their uses from unauthorized use by third parties to the extent that we obtain or have access to valid and enforceable patents that cover our contemplated commercial activities or are able to effectively protect any trade secrets, which cover aspects of our proprietary technology.

Our success depends upon our ability to protect our intellectual property and our proprietary technology.

The patent protection of our product candidates and technology involves complex legal and factual questions. We cannot be certain that any of the patents or patent applications owned by us or our licensors related to our product candidates and technology will provide adequate protection from competing products. Our success will depend, in part, on whether we or our licensors can:

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obtain and maintain patents to protect our product candidates;

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obtain and maintain any required or desirable licenses to use certain technologies of third parties, which may be protected by patents;

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protect our trade secrets and know-how; and

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operate without infringing the intellectual property and proprietary rights of others.

We cannot be certain that patents will be issued that adequately protect our product candidates as a result of pending applications. If a third party has also filed a patent application relating to an invention claimed by us or our licensors, we may be required to participate in an interference proceeding, if one is declared by the U.S. Patent and Trademark Office, to determine priority of invention, which could result in substantial uncertainties and cost for us, even if the eventual outcome is favorable to us. The degree of future protection for our proprietary rights is uncertain. For example:

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we might not have been the first to make the inventions covered by each of our pending patent applications;

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we might not have been the first to file patent applications for these inventions;

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others may independently develop similar or alternative technologies or duplicate any of our technologies;

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it is possible that none of our pending patent applications will result in issued patents;

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any patents under which we hold rights may not provide us with a basis for commercially-viable products, may not provide us with any competitive advantages or may be challenged by third parties as not infringed, invalid, or unenforceable under U.S. or foreign laws;

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any of the issued patents under which we hold rights may not be valid or enforceable or may be circumvented successfully; or

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we may not develop additional proprietary technologies that are patentable.

Proprietary trade secrets and unpatented know-how may also prove to be very important to our future research and development activities. However, we cannot be certain that others will not develop the same or similar technologies on their own. Although we have taken steps, including entering into confidentiality and intellectual property disclosure agreements with all of our employees to protect our trade secrets and unpatented know-how and keep them secret, third parties may still obtain this information.

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property, which could limit our ability to compete.

Because we operate in the highly technical field of drug discovery and development of drugs, we rely in part on trade secret protection in order to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We enter into confidentiality and intellectual property assignment agreements with our corporate partners, employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. These agreements generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us during the course of the party’s relationship with us. These agreements also generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time consuming and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. The failure to obtain or maintain trade secret protection could adversely affect our competitive position.

We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers or of our licensors.

Some of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. In addition, our business includes the licensing of intellectual property rights from other companies. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or of our licensors. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain potential drugs, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

A dispute concerning the infringement or misappropriation of our proprietary rights or the proprietary rights of others could be time consuming and costly, and an unfavorable outcome could harm our business.

There is significant litigation in our industry regarding patent and other intellectual property rights. While we are not currently subject to any pending litigation, and are not aware of any threatened litigation, we may be exposed to future litigation by third parties based on claims that our product candidates, technologies or activities infringe the intellectual property rights of others. There are many patents relating to chemical compounds and the uses thereof. If our compounds are found to infringe any such patents, we may have to pay significant damages. A patentee could prevent us from importing, making, using or selling the patented compounds. We may need to resort to litigation to enforce a patent issued to us, protect our trade secrets or determine the scope and validity of third-party proprietary rights. From time to time, we may hire scientific personnel formerly employed by other

companies involved in one or more areas similar to the activities conducted by us. Either we or these individuals may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. If we become involved in litigation, it could consume a substantial portion of our managerial and financial resources, regardless of whether we win or lose. We may not be able to afford the costs of litigation. Any legal action against us or our collaborators could lead to:

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payment of damages, potentially treble damages, if we are found to have willfully infringed a third party’s patent rights;

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injunctive or other equitable relief that may effectively block our ability to further develop, commercialize and sell our products; or

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we or our collaborators having to enter into license arrangements that may not be available on commercially acceptable terms, if at all.

As a result, we could be prevented from commercializing current or future products.

The patent applications of pharmaceutical companies involve highly complex legal and factual questions, which, if determined adversely to us, could negatively impact our patent position.

The patent positions of pharmaceutical companies can be highly uncertain and involve complex legal and factual questions. The U.S. Patent and Trademark Office’s standards are uncertain and could change in the future. Consequently, the issuance and scope of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. U.S. patents and patent applications may also be subject to interference proceedings, and U.S. patents may be subject to reexamination proceedings in the U.S. Patent and Trademark Office (and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent office), which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. Accordingly, rights under any issued patents may not provide us with sufficient protection against competitive products or processes.

In addition, changes in or different interpretations of patent laws in the U.S. and foreign countries, to the extent that patent laws exist at all in a foreign country, may permit others to use our discoveries or to develop and commercialize our technology and products without providing any compensation to us. The laws of some countries do not protect intellectual property rights to the same extent as U.S. laws and those countries may lack adequate rules and procedures for defending our intellectual property rights. For example, some countries, including many in Europe, do not grant patent claims directed to methods of treating humans, and in these countries, patent protection may not be available to the same extent as that found in the United States, if at all, to protect our product candidates.

If we fail to obtain and maintain patent protection and trade secret protection of our product candidates, proprietary technologies and their uses, we could lose our competitive advantage and competition we face would increase, reducing our potential revenues and adversely affecting our ability to attain or maintain profitability.

Risks Related to Our Industry

We will be subject to stringent regulation in connection with the marketing of any products derived from our product candidates, which could delay the development and commercialization of our products.

The pharmaceutical industry is subject to stringent regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Neither we nor our current or future collaborators can market our products in the United States until the product has undergone rigorous pre-clinical testing and clinical trials and the FDA has approved the products. We may never receive approvals. Satisfaction of regulatory requirements typically takes many years and requires substantial resources. Even if regulatory

approval is obtained, the FDA may impose significant restrictions on the indicated uses, conditions for use, labeling, advertising, promotion and/or marketing of such products, and post-approval studies, including additional research and development and clinical trials, may be required. These regulatory requirements may limit the size of the market for the product or result in the incurrence of additional costs. Any delay or failure in obtaining required approvals could have a material adverse effect on our ability to generate revenues from the particular product candidate.

In order to market our products outside of the United States, we and our strategic partners and licensees must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States, including the risk that our product candidate may not be approved for all indications that we request, which would limit the uses of our product and adversely impact our potential royalties and product sales. Such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies.

If we fail to comply with applicable regulatory requirements in the United States and other countries, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

If our competitors develop and market products that are more effective than our product candidates, they may reduce or eliminate our commercial opportunities.

Competition in the pharmaceutical industry is intense and is expected to increase. We face competition from pharmaceutical and biotechnology companies, as well as numerous academic and research institutions and governmental agencies, both in the United States and abroad. Some of these competitors have products or are pursuing the development of drugs that target the same diseases and conditions that are the focus of our product development programs.

Many of our competitors have substantially greater capital and research and development resources, manufacturing, sales and marketing capabilities and production facilities than we do. Smaller companies also may prove to be significant competitors, particularly through proprietary research discoveries and collaboration arrangements with established pharmaceutical companies. Our competitors could have products that are in advanced development and may succeed in developing drugs that are more effective, safer and more affordable or more easily administered than ours, or that achieve patent protection or commercialization sooner than our products. Our competitors may also develop alternative therapies that could further limit the market for any drugs that we may develop.

Rapid technological change could make our products obsolete.

Biopharmaceutical technologies have undergone rapid and significant change and we expect that they will continue to do so. Any compounds, products or processes that we develop may become obsolete or uneconomical before we recover any expenses incurred in connection with their development.

Consumers may sue us for product liability, which could result in substantial liabilities that exceed our available resources and damage our reputation.

Developing and commercializing drug products entails significant product liability risks. Liability claims may arise from our and our partners’ use of products in clinical trials and the commercial sale of those products.

Consumers may make product liability claims directly against us and/or our collaborators, and our collaborators or others selling these products may seek contribution from us if they incur any loss or expenses related to such claims. Although we currently have product liability insurance that covers our clinical trials, we will need to increase and expand this coverage as we commence larger scale trials and if our product candidates are approved for commercial sale. This insurance may be prohibitively expensive or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products that we or one of our partners develop. Product liability claims could have a material adverse effect on our business and results of operations. Liability from such claims could exceed our total assets if we do not prevail in any lawsuit brought by a third party alleging that an injury was caused by one or more of our drug products.

Health care reform measures could adversely affect our business.

The business and financial condition of pharmaceutical and biotechnology companies are affected by the efforts of governmental and third-party payors to contain or reduce the costs of health care. In the United States and in foreign jurisdictions there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed at changing the health care system. For example, in some countries other than the United States, pricing of prescription drugs is subject to government control, and we expect proposals to implement similar controls in the United States to continue. Another example of proposed reform that could affect our business is the current discussion of drug reimportation into the United States. In 2000, Congress directed the FDA to adopt regulations allowing the reimportation of approved drugs originally manufactured in the United States back into the United States from other countries where the drugs were sold at lower prices. Although the Secretary of Health and Human Services has refused to implement this directive, in July 2003, the House of Representatives passed a similar bill that does not require the Secretary of Health and Human Services to act. The reimportation bills have not yet resulted in any new laws or regulations; however, these and other initiatives could decrease the price we or any potential collaborators receive for our products, adversely affecting our profitability. The pendency or approval of such proposals could result in a decrease in our stock price or our ability to raise capital or to obtain strategic partnerships or licenses.

Risks Related to This Offering

Our stock price may be particularly volatile and you may lose all or a substantial part of your investment.

The market prices for securities of pharmaceutical companies in general, and early-stage companies in particular, have been highly volatile and may continue to be highly volatile in the future. Volatility in the market price for a particular company’s stock has often been unrelated or disproportionate to the operating performance of that company. Market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. The following factors, in addition to the other risk factors described in this prospectus, may have a significant impact on the market price of our common stock:

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the development status of our product candidates, including results of our clinical trials;

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market conditions or trends related to the pharmaceutical industry, or the market in general;

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announcements of technological innovations, new commercial products or other material events by our competitors or us;

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disputes or other developments concerning our proprietary rights;

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changes in, or failure to meet, securities analysts’ or investors’ expectations of our financial performance;

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additions or departures of key personnel;

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discussions of our business, products, financial performance, prospects or stock price by the financial and scientific press and online investor communities such as chat rooms;

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public concern as to the safety of drugs and drug delivery techniques;

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regulatory developments in the United States, Japan and other foreign countries; or

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economic and political factors, including wars, terrorism and political unrest.

In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often resulted. We may become subject to this type of litigation, which is often extremely expensive and diverts management’s attention, even if such litigation is ultimately concluded in a manner favorable to us.

In addition, the market price for our common stock may be affected by uncertainties with respect to the Mothers Market. The Mothers Market is a section of the Tokyo Stock Exchange that opened for business in November 1999. The Mothers Market was established to provide a market for emerging companies with high-growth potential to more easily access the public markets, to foster new industries and to provide for a wider choice of investment instruments. The Mothers Market places a greater emphasis on investor self-responsibility by not requiring a financial and operating history and by shortening the time period otherwise required for listing on the Tokyo Stock Exchange. If the Mothers Market does not prove to be able to provide a liquid trading market for our common stock, it may be difficult for you to sell our common stock at a price that is attractive to you, if at all.

If we raise additional capital in the future, your ownership in us could be diluted.

We expect that we will need to raise additional capital in the future. We may not be able to do so on favorable terms, if at all. Additional equity financings we may undertake may be dilutive to the holders of our common stock or cause the price of our common stock to decline. If we obtain funds through a credit facility or through the issuance of debt or preferred securities, these securities would have rights senior to your rights as a common stockholder. If we cannot obtain sufficient capital on commercially acceptable terms, we will not be able to fully carry out our business strategy.

There is no prior market for our common stock and you may not be able to resell your shares at or above the initial offering price.

Prior to this offering, there has been no public market for shares of our common stock. If you purchase shares of our common stock in this offering, you will not pay a price that was established in a competitive market. Rather, you will pay a price that we negotiated with the representatives of the underwriters. This price may not be indicative of prices that will prevail in the future in the trading market. Among the factors to be considered in determining the initial public offering price of the common stock, in addition to prevailing market conditions, will be:

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estimates of our business potential and the earnings prospects of the product candidates in our development programs;

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an assessment of our management; and

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market valuations of early-stage drug discovery and development companies.

The market price of our common stock may decline below the initial public offering price, and you may not be able to resell your shares at or above this price.

An active, liquid trading market may not develop following completion of this offering, or if developed, may not be maintained. Although we intend to list our shares on the Mothers Market of the Tokyo Stock Exchange, we may be unable to maintain that listing if we fail to record annual revenues of ¥100 million, approximately $900,000 under current exchange rates, per year. Our ability to generate this level of revenue from strategic collaboration fees and licensing fees during 2005 and, if we fail to do so, the willingness of the Tokyo Stock Exchange to grant us a waiver or grace period, are uncertain.

Our management has broad discretion over the use of the proceeds from this offering, and we may not use these proceeds effectively, which could adversely affect our results of operations.

Our management will have significant flexibility in applying the net proceeds of this offering and could use these proceeds for corporate purposes that do not increase our profitability or our market value, or in ways with which our stockholders may not agree. Investors will be relying on the judgment of our management regarding the application of the proceeds of this offering. We may use the net proceeds for corporate purposes that do not yield a significant return or any return at all for our stockholders, which may cause our stock price to decline.

If our officers, directors and largest stockholders choose to act together, they may be able to control our management and operations, acting in their own best interests and not necessarily in the best interests of other stockholders.

Following completion of this offering, our directors, executive officers and holders of 5% or more of our outstanding common stock and their affiliates will beneficially own approximately % of our common stock (after giving effect to the conversion of all outstanding shares of our preferred stock into shares of our common stock, but assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options or warrants). As a result, these stockholders, acting together, will have the ability to significantly influence all matters requiring approval by our stockholders, including the election of all of our directors, amendments to our restated certificate of incorporation, going-private transactions and the approval of mergers or other business combination transactions. The interests of this group of stockholders may not always coincide with our interests or the interests of the other stockholders, and this group of stockholders may act in a manner that advances their best interests but not necessarily those of the other stockholders.

If our stockholders sell substantial amounts of our common stock after this offering, the market price of our common stock may decline.

A significant number of shares of our common stock are held by a small number of stockholders. Sales of a significant number of shares of our common stock after this offering, for example, after the expiration of the lock-up agreements described elsewhere in this prospectus, or the expectation that such sales may occur, could significantly reduce the market price of our common stock. The holders of our common stock outstanding prior to this offering agreed with the underwriters to restrictions on sales of their shares for 180 days from the initial listing date. Following this lock-up period, those shareholders will generally have rights to cause us to file a registration statement on their behalf or include their shares in registration statements that we may file on our behalf or on behalf of other stockholders pursuant to a registration rights agreement that we have entered into with these stockholders.

As a new investor, you will experience immediate and substantial dilution in the net tangible book value of your investment.

Purchasers in this offering will experience immediate and substantial dilution in the net tangible book value per share of our common stock from the initial public offering price. Because we expect the offering price to be substantially higher than the net tangible book value per share of our common stock, if you purchase shares in this offering, you will incur dilution in the net tangible book value per share of your shares of $ . For a further description of the dilution that you will experience immediately after this offering, please see “Dilution.” In the past, we issued options and warrants to acquire capital stock at prices below the initial public offering price of common stock in this offering. As a result, there likely will be further dilution to investors upon exercise of these options and warrants.

We will incur increased costs as a result of recently enacted and proposed changes in laws and regulations relating to corporate governance matters.

Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted or proposed by the Securities and Exchange

Commission will result in increased costs to us as we evaluate the implications of any new rules and regulations and respond to new requirements under such rules and regulations. We will be required to comply with these rules and regulations after the completion of this offering. The new rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs to comply with these rules and regulations.

Changes in or interpretations of accounting rules and regulations, such as expensing of stock options, could result in unfavorable accounting charges or require us to change our compensation policies.

Accounting methods and policies for business and market practices of biopharmaceutical companies, including policies regarding expensing stock options, are subject to further review, interpretation and guidance from relevant accounting authorities, including the Securities and Exchange Commission, or SEC. For example, we currently are not required to record stock-based compensation charges if the employee’s stock option exercise price equals or exceeds the fair value of our common stock at the date of grant. Although the standards have not been finalized and the timing of a final statement has not been established, the Financial Accounting Standards Board, or FASB, has announced their support for expensing the fair value of stock options granted. If we were to change our accounting policy to expense the fair value of stock options granted and retroactively restate all prior periods presented, then our operating expenses and reported losses could increase. We rely heavily on stock options to compensate existing employees and attract new employees. If we are required to expense stock options, we may then choose to reduce our reliance on stock options as a compensation tool. If we reduce our use of stock options, it may be more difficult for us to attract and retain qualified employees. Although we believe that our accounting practices are consistent with current accounting pronouncements, changes to or interpretations of accounting methods or policies in the future may require us to reclassify, restate or otherwise change or revise our financial statements.

Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us more complicated and the removal and replacement of our directors and management more difficult.

Our restated certificate of incorporation and amended and restated bylaws contain provisions that may delay or prevent a change in control, discourage bids at a premium over the market price of our common stock or adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions may also make it difficult for stockholders to remove and replace our board of directors and management. These provisions:

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establish that members of the board of directors may be removed only for cause upon the affirmative vote of stockholders owning at least a majority of our capital stock;

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authorize the issuance of “blank check” preferred stock that could be issued by our board of directors in a discriminatory fashion designed to increase the number of outstanding shares and prevent or delay a takeover attempt;

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limit who may call a special meeting of stockholders;

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establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings;

•

prohibit our stockholders from making certain changes to our restated certificate of incorporation or amended and restated bylaws except with 66²/3% stockholder approval; and

•

provide for a classified board of directors with staggered terms.

We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for five years unless the holder’s acquisition of our stock was approved in advance by our board of directors. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders.

These provisions may delay or prevent a third party from acquiring us. Any such delay or prevention could cause the market price of our common stock to decline.

We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

We have paid no cash dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our businesses. In addition, the terms of existing or any future debts may preclude us from paying these dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by any forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Except as required by federal securities laws, we do not intend to update any forward-looking statements, whether as a result of new information, future events or otherwise.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be different materially from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus contains statistical data that we obtained from various third-party sources and publications. These sources and publications generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy or completeness of the information. Although we believe that the sources and publications are reliable, we have not verified independently the data and make no representation as to the accuracy of the data we have included.

USE OF PROCEEDS

We expect that the net proceeds we will receive from the sale of the shares of common stock offered by us will be approximately $ , based on an assumed initial public offering price of $ per share, which is the midpoint of our expected public offering range, and after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional working capital, establish a public market for our common stock and facilitate our future access to public markets. We expect to use the majority of the net proceeds of this offering to continue the development and prepare for the commercialization of the product candidates in our core programs, for other working capital and general purposes and to advance the clinical trials of the product candidates in our partnering programs. In addition, we may use a portion of the net proceeds of this offering to in-license additional product candidates.

The amounts and timing of our actual expenditures depend on several factors, including the progress of our research and development efforts and the amount of cash used by our operations. We have not determined the amount or timing of the expenditures in the areas listed above. Pending their use, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing instruments.

DIVIDEND POLICY

We have never declared or paid dividends on our capital stock and do not anticipate paying dividends in the foreseeable future. We currently intend to retain our earnings, if any, for the growth and development of our business.

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2004:

•

on an actual basis;

•

on a pro forma basis to give effect to (1) the sale of 27,667,856 shares of Series C preferred stock in a recent private financing, and (2) the filing of a restated certificate of incorporation to provide for authorized capital stock of 83,000,000 shares of common stock and 28,959,006 shares of preferred stock; and

•

on a pro forma basis as adjusted to give effect to (1) the anticipated filing of a restated certificate of incorporation to provide for authorized capital stock of 200,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock, (2) the sale by us of shares of common stock at an assumed initial public offering price of $ per share in this offering and the receipt of the estimated net proceeds therefrom, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (3) the conversion of all of our outstanding shares of preferred stock into 66,782,856 shares of common stock upon the closing of this offering.

You should read the information in this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and accompanying notes appearing elsewhere in this prospectus.


	As of June 30, 2004
	Actual			Pro Forma			Pro Forma As Adjusted
Cash, cash equivalents and marketable securities available-for-sale	$	15,191,264		$	58,622,420		$

Redeemable convertible preferred stock, $0.01 par value pro forma and pro forma as adjusted; actual—no shares authorized, issued and outstanding; pro forma—27,667,856 shares authorized, issued and outstanding; pro forma as adjusted—no shares authorized, issued and outstanding	$	—		$	43,431,156		$

Stockholders’ equity:
Convertible preferred stock, $0.01 par value actual, pro forma and pro forma as adjusted; actual—5,000,000 shares authorized; 1,291,150 shares issued and outstanding; pro forma —28,959,006 shares authorized; 28,959,006 shares issued and outstanding; pro forma as adjusted—5,000,000 shares authorized; no shares issued and outstanding		12,912			12,912
Common stock, $0.001 par value actual, pro forma and pro forma as adjusted; actual—80,000,000 shares authorized; 500,000 shares issued and outstanding; pro forma—83,000,000 shares authorized; 500,000 shares issued and outstanding; pro forma as adjusted—200,000,000 shares authorized; shares issued and outstanding		500			500
Additional paid-in capital		57,406,689			57,406,689
Deferred employee stock-based compensation		(1,127,510	)		(1,127,510	)
Deficit accumulated during the development stage		(41,833,269	)		(41,833,269	)

Total stockholders’ equity		14,459,322			14,459,322

Total capitalization	$	14,459,322		$	57,890,478		$

The number of shares in the table above excludes, as of September 30, 2004:

•

1,510,000 shares of common stock subject to options outstanding, at a weighted average exercise price of $1.00 per share;

•

13,356,572 shares of common stock subject to warrants outstanding, at a weighted average exercise price of $0.13 per share; and

•

additional shares of common stock reserved for future grant or issuance under our 2004 Stock Incentive Plan.

As disclosed in Note 9 to our financial statements, in connection with the sale of Series C preferred stock, we will record in the third quarter of 2004 a deemed dividend of $31.3 million and a stock-based compensation charge of $14.7 million.

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. As of June 30, 2004, we had a net tangible book value of $14.5 million, or $28.92 per share of common stock, not taking into account the conversion of our outstanding preferred stock, including the conversion of the Series C preferred stock sold in a recent private financing into common stock. Net tangible book value per share is equal to our total tangible assets (total assets less intangible assets) less total liabilities, divided by the number of shares of our outstanding common stock. After giving effect to the conversion of all of our preferred stock, including the conversion of the Series C preferred stock and the sale of shares of common stock offered by this prospectus at an assumed initial public offering price of $ per share, the midpoint of the range shown on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and our estimated offering expenses, our pro forma as adjusted net tangible book value as of June 30, 2004 was approximately $ million, or approximately $ per pro forma share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution of $ per share to new investors in this offering. If the initial public offering price is higher or lower than $ per share, the dilution to new stockholders will be higher or lower, respectively. The following table illustrates this per share dilution:


Assumed initial public offering price per share		$

Pro forma as adjusted net tangible book value per share before this offering	$
Increase per share attributable to new investors

Pro forma as adjusted net tangible book value per share after this offering

Dilution per share to new investors		$

The following table sets forth on a pro forma as adjusted basis, as of June 30, 2004, the number of shares of common stock issued by us, the total consideration received and the average price per share paid by existing holders of common stock and by the new investors.


	Shares Purchased		Total Consideration			Average Price Per Share
	Number	Percent	Amount		Percent	Average Price Per Share
Existing stockholders	67,282,856	%	$	83,986,927	%	$	1.25
New investors

Total		%	$		%

The discussion and tables above assume no exercise of the underwriters’ over-allotment option, the outstanding warrants or any outstanding stock options. If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by the new investors will be increased to shares or % of the total number of shares of common stock outstanding after this offering. See “Principal Stockholders.”

As of September 30, 2004, there were 1,510,000 shares of common stock subject to options outstanding, at a weighted average exercise price of $1.00 per share. As of September 30, 2004, there were also 13,356,572 shares of common stock subject to warrants outstanding, at a weighted average exercise price of $0.13 per share. To the extent any of these options or warrants are exercised, new options are issued under our stock option plans or we issue additional shares of common stock in the future, there will be further dilution to new investors.

SELECTED FINANCIAL DATA

The statements of operations data for the years ended December 31, 2001, 2002 and 2003 and the balance sheet data as of December 31, 2002 and 2003 are derived from our audited financial statements included elsewhere in this prospectus. The statements of operations data for the period from September 26, 2000 (inception) to December 31, 2000 and the balance sheet data as of December 31, 2000 and 2001 have been derived from our audited financial statements not included in this prospectus. We have also included data for the six months ended June 30, 2003 and 2004 and the period from September 26, 2000 (inception) to June 30, 2004 from our unaudited interim financial statements included elsewhere in this prospectus. You should read this data together with our financial statements and related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


	Period from September 26, 2000 (inception) to December 31, 2000			Years ended December 31,									Six months ended June 30,						Period from September 26, 2000 (inception) to June 30, 2004
				2001			2002			2003			2003			2004
	(in thousands, except share and per share data)
Statements of Operations Data:

Revenues	$	—		$	—		$	—		$	—		$	—		$	187		$	187
Cost of revenues		—			—			—			—			—			166			166

Gross profit		—			—			—			—			—			21			21
Operating expenses:
Research and development		272			952			5,551			4,723			2,229			6,108			17,606
General and administrative		—			1,063			1,462			1,538			707			1,224			5,286
Amortization of employee stock-based compensation:
Research and development		—			—			—			—			—			14			14
General and administrative		—			—			—			—			—			10			10
Stock-based compensation related to founders’ warrants		—			—			—			—			—			19,406			19,406

Total operating expenses		272			2,015			7,013			6,261			2,936			26,762			42,322

Operating loss		(272	)		(2,015	)		(7,013	)		(6,261	)		(2,936	)		(26,741	)		(42,301	)
Other income, net		71			220			82			52			24			44			468

Net loss	$	(201	)	$	(1,795	)	$	(6,931	)	$	(6,209	)	$	(2,912	)	$	(26,697	)	$	(41,833	)

Basic and diluted net loss per share⁽¹⁾	$	(0.40	)	$	(3.59	)	$	(13.86	)	$	(12.42	)	$	(5.82	)	$	(53.39	)

Shares used to compute basic and diluted net loss per share⁽¹⁾		500,000			500,000			500,000			500,000			500,000			500,000

Pro forma net loss per common share assuming conversion of preferred stock, basic and diluted⁽¹⁾										$	(0.37	)				$	(0.96	)

Shares used in computing pro forma net loss per common share assuming conversion of preferred stock, basic and diluted⁽¹⁾											16,778,767						27,946,401

⁽¹⁾	See Note 1 to our financial statements for an explanation of the method used to calculate the historical and pro forma net loss per share and the number of shares used in the computation of the per share amounts.

⁽²⁾	As disclosed in Note 9 to our financial statements, in connection with the sale of Series C preferred stock, we will record in the third quarter of 2004 a deemed dividend of $31.3 million and a stock-based compensation charge of $14.7 million.


	As of December 31,												As of June 30, 2004
	2000			2001			2002			2003			As of June 30, 2004
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable securities available-for-sale	$	5,074		$	8,054		$	1,281		$	5,491		$	15,191
Working capital		4,847			7,756			876			4,838			14,291
Total assets		5,121			8,379			1,586			5,631			15,632
Deficit accumulated during the development stage		(201	)		(1,996	)		(8,928	)		(15,137	)		(41,833	)
Total stockholders’ equity		4,849			8,054			1,122			4,570			14,459

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors” and elsewhere in this prospectus. These risks could cause our actual results to differ materially from any future performance suggested below. We undertake no obligation to update these forward-looking statements to reflect events or circumstances arising after the date of this prospectus. You should read this discussion together with the financial statements, related notes and other financial information included elsewhere in this prospectus.

Overview

We are a specialty pharmaceutical company focused on acquiring, developing and commercializing innovative pharmaceutical products for a variety of diseases and conditions. We actively seek to identify and acquire license rights to product candidates with extensive safety and efficacy data that are in late pre-clinical or early clinical development and that address large markets with significant opportunities for improved therapies. To date, we have acquired license rights to four compounds. We currently have one Phase I clinical trial ongoing for a product candidate and anticipate entering into Phase II clinical trials with four other product candidates by the end of the first half of 2005.

We are a development stage company. We have incurred significant net losses since our inception. As of June 30, 2004, our accumulated deficit was approximately $41.8 million, including a $19.4 million non-cash stock-based compensation charge related to founders’ warrants. We expect to incur substantial net losses for the next several years as we continue to develop our existing programs, expand our research and development programs and acquire or in-license products, technologies or businesses that are complementary to our own.

Revenues and Cost of Revenues

We have not generated any revenues from licensing, milestones or product sales to date, and we do not expect to generate these revenues within the next 12 to 18 months. Our revenues to date have been generated from a development management contract under which we bill consulting fees and pass-through clinical contract costs. The primary cost associated with our revenue is the clinical contract costs we incur and pass-through to our customer.

Research and Development

Our research and development expenses primarily consist of costs associated with the feasibility, licensing and pre-clinical and clinical development of our four licensed compounds, one of which we are developing for the treatment of two separate indications. These research and development expenses include external costs such as fees paid to consultants and related contract research, and internal costs of compensation and other expenses for research and development personnel, supplies, materials, facility costs and depreciation.

General and Administrative

Our general and administrative expenses primarily consist of salaries and benefits and consulting and professional fees related to our administrative, finance, human resources, legal and internal systems support functions. In addition, general and administrative expenses include insurance and facilities costs.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that

affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are more fully described in Note 1 to our financial statements appearing at the end of this prospectus. The following accounting policies are important in fully understanding and evaluating our reported financial results.

Stock-Based Compensation

We account for employee stock options and warrants using the intrinsic-value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and have adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.

Stock-based compensation expense, which is a non-cash charge, results from stock option and warrant issuances at exercise prices below the deemed fair value of the underlying common stock. We recognize this compensation expense on a straight-line basis over the vesting period of the underlying option, generally four years, and, since the warrants are variable, at the time of issuance for warrants and/or each time the estimated fair value of the warrants increase.

We have granted stock options to employees in exchange for services. Given the absence of an active market for our common stock, we are required to estimate the fair value of our common stock based on a variety of company and industry-specific factors for the purpose of measuring the cost of the transaction and properly reflecting it in our financial statements. In connection with the preparation of the financial statements necessary for the filing of our initial public offering, we have reassessed the fair value of our common stock.

We granted certain stock options during the six months ended June 30, 2004 that resulted in deferred stock-based compensation of $1.2 million. Deferred stock compensation represents the difference between the deemed fair value of common stock and the option exercise price at the date of grant. It is recorded as a reduction to stockholders’ equity and is amortized as compensation expense over the vesting period of the options, generally four years. The amount of deferred stock-based compensation expensed for the six months ended June 30, 2004 was $24,000. Based on deferred stock-based compensation amounts recorded through June 30, 2004, the total amortization expense for the six months ending December 31, 2004 and the years ending December 31, 2005, 2006, 2007 and 2008 will be $144,000, $288,000, $288,000, $288,000 and $120,000, respectively.

During the six months ended June 30, 2004, pursuant to the anti-dilution provisions of the warrants originally issued in September 2000 to our founders and as a result of the sale of our Series B preferred stock, we adjusted the warrants to provide that our two founders may purchase an aggregate of 7,323,000 shares of our common stock. As a result, we recorded $19.4 million of stock-based compensation expense to reflect the difference between the deemed fair value of the underlying common stock and the warrant exercise price at June 30, 2004 for all warrants issued to date. On September 2, 2004, in conjunction with the sale of our Series C preferred stock, the terms of the warrants were amended in order to fix the number of shares purchasable thereunder to an aggregate of 12,856,572 shares and to remove the anti-dilution provisions. As a result, we expect to record stock-based compensation of $14.7 million based on the estimated fair value of the underlying common stock on September 2, 2004. We otherwise do not anticipate recording any additional stock-based compensation in connection with these warrants.

Recent Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS No. 150”). SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective the beginning of the first interim period after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on our financial statements.

Results of Operations

Comparison of the Six Months Ended June 30, 2004 and 2003

Revenues

Our revenue totaled $0.2 million for the six months ended June 30, 2004 from development management services performed under a master services agreement. We had no revenue during the same period in 2003.

Research and Development

Research and development expenses increased to $6.1 million for the six months ended June 30, 2004 from $2.2 million for the comparable period during 2003. This increase primarily was due to:

•

external costs related to the licensing of MN-221 and MN-305;

•

increased Phase I clinical study costs related to MN-001; and

•

increased pre-clinical development costs related to MN-029.

In addition, internal costs for salaries and related personnel costs increased due to an increase in research and development staff. We expect that fees paid to external service providers will continue to increase as we acquire new drug candidates and continue development of our existing drug candidates. We anticipate that our research and development expenses will continue to increase in future periods as we expend additional capital to conduct clinical trials and develop our product candidates.

General and Administrative

General and administrative expense increased to $1.2 million for the six months ended June 30, 2004 from $0.7 million for the comparable period during 2003. This increase primarily was due to increased legal and other professional fees and increased personnel costs as we expanded our general and administrative functions to support our operations. We anticipate increases in general and administrative expenses in future periods as we expand our administrative organization and incur additional costs for insurance and professional fees associated with operating as a public company and to support the future growth of our research and development organization.

Stock-Based Compensation

Stock-based compensation expense totaled $19.4 million for the six months ended June 30, 2004 due to the issuance of warrants at exercise prices below the deemed fair value of our common stock and the amortization of deferred stock-based compensation. We had no issuances of options or warrants during the comparable period in 2003 that required us to record stock-based compensation expense.

Comparison of the Years Ended December 31, 2003, 2002 and 2001

Research and Development

Research and development expense totaled $4.7 million in 2003, compared to $5.6 million in 2002 and $1.0 million in 2001. The $0.9 million decrease from 2002 to 2003 primarily was due to the reduction in discovery and pre-clinical activities as a result of the reduced scope of our store-operated calcium channel, or SOCC, program and a decline in spending on MN-001 as a result of small scale Phase I clinical trials being less costly in 2004 than the formulation and toxicology work in 2003. The decreases were offset by increased spending on MN-029 as we performed substantial pre-clinical activities in preparation for our IND filing in April 2004. The $4.6 million increase from 2001 to 2002 primarily was due to expanded discovery and pre-clinical activities related to our SOCC program and licensing and pre-clinical development of MN-001 and MN-002.

General and Administrative

General and administrative expense totaled $1.5 million in 2003, compared to $1.5 million in 2002 and $1.1 million in 2001. Although the total expense remained constant from 2002 to 2003, several of the underlying account balances fluctuated, including increases in salaries and related costs, consulting fees paid to the chairman of our board of directors, rent and travel, which were offset by decreases in outside consulting and professional fees and depreciation. The $0.4 million increase from 2001 to 2002 primarily was due to consulting fees paid to the chairman of our board of directors, recruiting, public relations and travel expenses.

Other Income, Net

Other income, net is primarily interest income earned on our cash and investment balances and totaled $0.1 million, $0.1 million and $0.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. The change in income amounts for each year primarily was due to fluctuations in our average cash and investment balances and downward interest rate trends.

Liquidity and Capital Resources

Since our inception, our operations have been financed through the private placement of our equity securities. Through June 30, 2004, we received net proceeds of $36.8 million from the sale of shares of preferred stock as follows:

•

in October 2000, and again in August 2001, we issued and sold 1,000,000 shares of Series A preferred stock for aggregate net proceeds of $10 million; and

•

from March 2003 through May 2004, we issued and sold 291,150 shares of Series B preferred stock for aggregate net proceeds of $26.8 million.

In addition, on September 2, 2004, we issued and sold 27,667,856 shares of Series C preferred stock for aggregate net proceeds of $43.4 million.

As of June 30, 2004, we had $15.2 million in cash and investments as compared to $5.5 million as of December 31, 2003, an increase of $9.7 million. This increase primarily resulted from completion of the sale of our Series B preferred stock. Net cash used in operating activities amounted to $7.0 million for the six months ended June 30, 2004, primarily reflecting the net loss occurring for this period of $26.7 million, offset by non-cash charges for stock-based compensation of $19.4 million. Net cash used in investing activities for the six months ended June 30, 2004 consisted of $0.1 million of capital equipment purchases. Net cash provided by financing activities amounted to $16.9 million for the six months ended June 30, 2004, primarily reflecting the sale of Series B preferred stock.

Net cash used in operating activities totaled $5.9 million in 2003, compared to $6.8 million in 2002 and $1.7 million in 2001. The increase in net cash used in operating activities from 2001 to 2002 primarily was due to the licensing and initiation of development of MN-001 in 2002 and increased research activity related to our SOCC program. The decrease in net cash used in operating activities from 2002 to 2003 primarily was due to increases

related to the initiation of Phase I clinical trials for MN-001, offset by the reduction in the scope of research activity related to our SOCC program.

Net cash used in investing activities from 2001 through 2003 totaled $1.4 million and related to the purchase of marketable securities and the acquisition of capital equipment.

Net cash provided by financing activities totaled $10.0 million in 2003 and $5.0 million in 2001 resulting from the sale of preferred stock. We did not have any financing transactions during 2002.

As of September 30, 2004, our long-term contractual obligations consisted of our facility lease. For the six months ending December 31, 2004 and the years ending December 31, 2005, 2006, 2007 and 2008, we are obligated to make payments of $150,856; $400,392; $435,356; $448,997 and $37,511, respectively.

Our future capital uses and requirements depend on numerous forward-looking factors. These factors include but are not limited to the following:

•

the progress of our clinical trials;

•

the progress of our pre-clinical development activities;

•

our ability to establish and maintain strategic collaborations, including by sub-licensing product candidates;

•

the costs involved in enforcing or defending patent claims and other intellectual property rights;

•

the costs and timing of regulatory approvals;

•

the costs of establishing or expanding manufacturing, sales and distribution capabilities;

•

the success of the commercialization of our products; and

•

the extent to which we acquire or invest in other products, technologies and businesses.

We believe that our existing cash and cash equivalents, excluding the proceeds from this offering, will be sufficient to meet our projected operating requirements through at least December 31, 2005.

Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources that primarily were generated from the proceeds of offerings of our equity securities and from equipment and leasehold improvement financing. In addition, we may finance future cash needs through the sale of other equity securities, strategic collaboration agreements and debt financing. However, we may not be successful in obtaining collaboration agreements, or in receiving milestone or royalty payments under those agreements. In addition, we cannot be sure that our existing cash and marketable securities resources will be adequate or that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Failure to obtain adequate financing also may adversely affect our ability to operate as a going concern. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

Quantitative and Qualitative Disclosure About Market Risk

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term nature of our cash and investments, we believe that we are not subject to any material market risk exposure. Our cash and investments at June 30, 2004 included primarily liquid money market accounts.

BUSINESS

Overview

•

are in late pre-clinical or early clinical development and have extensive safety and efficacy data; and

•

address large markets with significant opportunities for improved therapies.

We believe that this approach allows us to move more quickly into the clinical development process in the United States. To date, we have acquired license rights to four compounds. We currently have one Phase I clinical trial ongoing for a product candidate and anticipate entering into Phase II clinical trials with four other product candidates by the end of the first half of 2005.

We intend to continue to build a strong product pipeline by establishing relationships with large and mid-sized North American, European and Japanese biotechnology and pharmaceutical companies. Since our inception, we have established relationships with a number of pharmaceutical companies, including Kissei Pharmaceutical, Kyorin Pharmaceutical and Mitsubishi Pharma Corporation, pursuant to which we have obtained rights to develop and market compounds. We believe the establishment of these relationships in Japan provides us with a competitive advantage in identifying and acquiring compounds from Japanese pharmaceutical companies.

Our development programs follow a dual pathway:

•

Strategic Core Programs. Our strategic core programs consist of product candidates we intend to retain the rights to through final regulatory approval in the United States and commercialize directly.

•

Partnering Programs. Our partnering programs consists of product candidates we intend to license to larger pharmaceutical companies after advancing them through Phase II clinical trials and with respect to which we intend to retain co-promotion rights.

We believe this strategy will diversify our development risks by enabling us to acquire a larger portfolio of product candidates, targeting more diverse indications, than other specialty pharmaceutical companies of similar size.

Strategic Core Programs. Our strategic core programs focus on therapeutic needs that are underserved by large pharmaceutical companies. We are targeting potential markets that are of a size attractive to us but which may draw only limited interest from large pharmaceutical companies. We believe that the product candidates in our strategic core program will have limited development costs which will enable us to undertake the entire development and commercialization of these products in the United States. We intend to seek licensing partners for the development and commercialization of these products outside the United States.

Currently our strategic core programs are focused on the urology and obstetrics/gynecology markets. These are markets in which we believe we can pursue regulatory approval and develop a marketing and sales infrastructure in the United States utilizing our own resources and without partnering with larger pharmaceutical companies.

Our existing strategic core programs consist of:

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MN-221 for the treatment of premature labor, for which we intend to file an IND application to permit commencement of Phase II clinical trials in the first half of 2005;

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MN-029 for the treatment of solid tumors, currently in Phase I clinical trials; and

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MN-001 for the treatment of interstitial cystitis, for which we intend to file an IND application to permit commencement of Phase II clinical trials by the end of the first quarter of 2005.

Partnering Programs. Our partnering programs focus on product candidates for larger markets that typically require significantly greater clinical development and commercialization resources than our strategic core programs. We intend to increase the value of the product candidates in our partnering programs by advancing Phase I/II clinical testing to the point where potential partners are willing to make a substantial investment in conducting later-stage clinical trials and further their development and commercialization.

We believe that our partnering programs will allow us to generate revenues at an earlier stage through the licensing of product candidates during the clinical testing process. Our partnering programs currently are focused on asthma and anxiety. Our existing partnering programs consist of:

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MN-001 for the treatment of bronchial asthma; currently anticipated to enter a Phase II clinical trial by the end of 2004; and

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MN-305 for the treatment of anxiety, for which we similarly intend to commence a Phase II clinical trial by the end of the first quarter of 2005.

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assessing product opportunities;

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acquiring product candidates and compounds;

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advancing products through the clinical and regulatory processes; and

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building product development alliances and bringing products to market.

Our Strategy

Our goal is to become a leader in the development and commercialization of drugs for the treatment of diseases with unmet medical needs. Key elements of our strategy are to:

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Execute our dual pathway development approach. We have acquired a variety of product candidates that are based on proven pharmacology but have differentiating characteristics from available treatments. We believe that our dual pathway development approach enables us to diversify our development risks with respect to these product candidates. We intend to advance our existing and future candidates without excessive reliance on any one program and thereby increase our likelihood of long-term success. Moreover, we believe that our dual pathway development approach significantly enhances our ability to generate near-term revenue opportunities through our partnering program, as well as to generate long-term sustained revenue opportunities through our strategic core programs.

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Continue to expand our pipeline of promising product candidates. We intend to continue to identify and license product candidates in late pre-clinical or early clinical development. We believe our ability, attributable in particular to the relationships and efforts of our management, to acquire product candidates with high potential and extensive pre-clinical or early clinical data from Japanese pharmaceutical companies is an advantage over other specialty drug development companies in the U.S. market. We are in active negotiations to license additional product candidates from this source. For each licensing candidate, we conduct extensive diligence not only on the patent rights and therapeutic needs addressed, but also on the market opportunities, level of competition and strategic fit with our existing programs. We believe that we will mitigate the risks inherent in drug discovery and development by expanding and further diversifying our pipeline of product candidates.

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Partner selectively with larger pharmaceutical companies to maximize the commercial potential of our product candidates. We intend to actively pursue strategic collaborations to draw on the development, regulatory and commercialization expertise of large biotechnology and pharmaceutical partners. We are

already soliciting preliminary indications of interest with respect to our partnering programs. We also continue to seek additional in-licensing opportunities, potential co-marketing partners and potential future acquirors of license rights to our core programs in markets outside the United States. Through these efforts, we are positioning ourselves to realize a return on our investment quickly if the results of our clinical testing programs are favorable.

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Continue to strengthen our management team. As we have assembled our existing product candidate portfolio, we have also carefully assembled a management team with extensive experience in all aspects of the drug development process from acquisition through commercialization. We expect to selectively add to this team in the near to mid-term in order to further strengthen our core competencies and enable us to execute our development programs as expeditiously as possible.

Product Development Programs.

Our product development programs address diseases that are not well served by currently available therapies and represent significant commercial opportunities. We believe that our product candidates offer innovative therapeutic approaches that may provide significant advantages relative to current therapies. The following table summarizes our strategic core and partnering programs:


Product candidate	Disease/ Indication	Phase of Development	Licensor	Licensed Territory

*Strategic Core Programs*

MN-221	Premature labor	Phase II to commence in first half of 2005; Early Phase II completed in UK by Kissei; U.S. IND in preparation	Kissei Pharmaceutical	Worldwide, except Japan

MN-029	Solid tumor	Phase I ongoing in the U.S.	Angiogene Pharmaceuticals	Worldwide

MN-001	Interstitial cystitis	Phase II to commence in Q1, 2005; U.S. IND in preparation	Kyorin Pharmaceutical	Worldwide, except Japan, China, Taiwan, and South Korea

*Partnering Programs*

MN-001	Bronchial asthma	Phase II to commence in Q4, 2004; U.S. IND submitted	Kyorin Pharmaceutical	Worldwide, except Japan, China, Taiwan, and South Korea

MN-305	Generalized Anxiety Disorder	Phase II to commence in Q1, 2005; Early Phase II for Generalized Anxiety Disorder completed by Mitsubishi; Phase II for Major Depressive Disorder completed by Mitsubishi; U.S. IND in effect	Mitsubishi Pharma	Worldwide, except Japan, Singapore, Brunei, Thailand, Malaysia, Indonesia, the Philippines, Vietnam, Bangladesh, Pakistan, South Korea, China and Taiwan

*Other Program*

Store-operated calcium channel antagonists	Cancer; Inflammatory diseases	Research	RIKEN, University of Tokyo	Worldwide

We typically acquire product candidates with significant pre-clinical and early clinical testing data that has been developed by the licensors outside of the United States. We utilize this data in preparing IND applications and designing additional clinical trials to advance the regulatory approval process in the United States.

Strategic Core Programs

MN-221 for Premature Labor

Disease Overview. Premature labor is caused by the onset of uterine contractions before term and is the leading cause of neonatal mortality and a substantial portion of all birth-related short- and long-term morbidity, according to a November 2002 publication in Obstetrics & Gynecology. Successfully inhibiting premature labor is known to reduce the risk of complications. Despite extensive research into premature labor during the past several decades, the rate of premature births has not changed. According to National Vital Statistics Reports published in December 2003, in each of the years 2002, 2001 and 2000, there were over 4 million live births in the U.S. According to the November 2002 publication in Obstetrics & Gynecology, at least 11% of all births each year in the U.S. and approximately 5-7% of all births in Europe occur before term. According to a recent publication by the U.S. National Institutes of Health, over $4 billion is spent on caring for premature infants each year.

Currently, therapy for premature labor remains targeted at uterine contractions. ß₂-adrenergic receptor agonists are widely used as first-line treatments for premature labor. The only FDA-approved treatment for premature labor is ritodrine, a ß₂ agonist. However, ritodrine was withdrawn in 1999 from the market due to its side effects. The more widely used treatment for premature labor, terbutaline, another ß₂ agonist, is not approved by the FDA for premature labor. Atosiban, an oxytocin antagonist, is available in Europe, but was denied regulatory approval in the U.S. The usefulness of these ß₂-adrenergic receptor agonists is often limited by the adverse reactions they produce, including cardiovascular side effects such as heart palpitations. As a result, there is a need for treatments that are effective in reducing the premature birth rate and/or providing for longer gestation, with better safety and tolerability profiles.

MN-221. MN-221 is a novel, highly selective ß₂-adrenergic receptor agonist for use in the treatment of premature labor. We have licensed MN-221 from Kissei Pharmaceutical. Pre-clinical pharmacology studies conducted by Kissei Pharmaceutical have shown that MN-221 effectively suppresses spontaneous or drug-induced uterine contractions. The potency of MN-221 in pre-clinical models was greater than that of any of the ß₂-adrenergic receptor agonists currently used for the treatment of premature labor. Furthermore, MN-221 is effective in delaying both normal and premature labor in rats and has been shown to cause a marked increase in the bodyweight of rat pups as a result of prevention of premature birth. Moreover, receptor binding studies conducted by Kissei Pharmaceutical suggest that the stimulating action of ß₂-adrenergic receptor agonists on the heart, which is a problem with current drugs for treating premature labor, is reduced with MN-221 due to its selectivity for uterine ß₂-adrenergic receptors.

To date, pharmacokinetic and safety data has been generated from human experience with MN-221 by a Phase I clinical study in healthy male and female volunteers conducted by Kissei Pharmaceutical in Japan and the U.K. A total of 94 subjects received intravenous infusions of either MN-221 or a placebo. MN-221 was generally well tolerated and no subject was withdrawn due to any adverse event. A pilot double-blind, placebo-controlled Phase II clinical trial of MN-221 was completed in 2004 by Kissei Pharmaceutical in 8 women in premature labor in the U.K. No serious adverse events were observed in this study.

We intend to use a dose-titration schedule to study MN-221 in a larger Phase II clinical trial. We anticipate filing the U.S. IND in late 2004. Phase II testing will commence upon acceptance of the IND by the FDA.

MN-001 for Interstitial Cystitis

Disease Overview. Interstitial cystitis, or IC, is a chronic disease of the bladder characterized by urinary frequency and urgency, night-time urination and pain above the pubic bone. It is widely believed that IC is due to an altered or defective bladder lining and an increased number of activated bladder mast cells, which are specialized cells that release biochemicals that cause inflammation. According to a July 2003 U.S. National Institutes of Health publication by the National Kidney and Urologic Diseases Information Clearinghouse,

approximately 700,000 patients suffer from IC in the United States, 90% of whom are women. We believe that IC is currently underdiagnosed, in part, due to the relative lack of effective treatments. We believe that the market for IC will likely expand with the introduction of effective new treatments.

MN-001. MN-001 is a novel, anti-inflammatory compound for the treatment of IC. In connection with our partnering program, we have collected data relating to the development of MN-001 for bronchial asthma. We have licensed MN-001 from Kyorin Pharmaceutical. The data collected by Kyorin Pharmaceutical provided a strong scientific rationale for evaluating MN-001 as an oral treatment for IC.

Pre-clinical tests conducted by Kyorin Pharmaceutical and us have demonstrated that MN-001 affects many of the downstream mechanisms activated by mast cell degranulation. Mast cell degranulation is the release of naturally-occurring biochemicals that cause inflammation. MN-001 and its primary metabolite, MN-002, have been shown to block the effects of these naturally-occurring inflammatory biochemicals. MN-001 is also a potent inhibitor of pro-inflammatory enzymes and prevents the migration of inflammatory cells to the bladder. MN-001 may reduce bladder hyper-reactivity and inflammation much in the same way that it reduces airway hyper-reactivity and inflammation in models of asthma by blocking these inflammatory mechanisms. We intend to pursue a parallel development strategy for MN-001 in IC and asthma to maximize the benefits of the existing pre-clinical and clinical safety database.

We intend to file a U.S. IND in late 2004 to evaluate MN-001 in a multi-center, placebo-controlled, randomized, double-blind, parallel-group study in patients with IC. Phase II testing will commence upon acceptance of the IND by the FDA.

MN-029 for Solid Tumors

Disease Overview. The American Cancer Society estimates that more than 1.3 million Americans will be diagnosed with cancer in 2004. Of these, more than 700,000 patients will be diagnosed with lung, prostate, colon or breast solid tumor cancers. At least 500,000 are expected ultimately to die from the disease. According to Med Ad News, a leading pharmaceutical industry journal, sales of cancer drugs in 2003 exceeded $13.5 billion, $10 billion of which related to treatment of solid tumors.

Tumor blood vessels are a promising target for cancer therapy. Compounds that act to deprive tumors of their blood supply fall into two classes: angiogenesis inhibitors and vascular targeting agents, or VTAs. Angiogenesis inhibitors block the formation of new blood vessels formed in response to tumor growth. VTAs disrupt blood flow through existing tumor blood vessels by damaging the vessel walls. VTAs have a potential advantage over angiogenesis inhibitors because VTAs work on existing tumor blood vessels and can kill hundreds of cancer cells that depend on that blood supply with even a brief interruption in blood flow, rather than simply slowing tumor growth by blocking new blood vessel formation.

MN-029. MN-029 is a novel, small molecule VTA under development for the treatment of cancer. We have licensed MN-029 from Angiogene Pharmaceuticals. Pre-clinical pharmacology studies conducted by Angiogene Pharmaceuticals and us have assessed the mechanism of action and anti-tumor activity of MN-029. MN-029 has been demonstrated to damage poorly formed tumor blood vessels by weakening tumor blood vessel walls and causing leakage, clotting and eventual vascular shutdown within the tumor. MN-029 is also unique because its mechanism is short-acting and is then quickly cleared from the body, thus reducing the potential for side effects commonly associated with currently available chemotherapies.

We intend to evaluate MN-029 as a method of treatment for solid tumors. The FDA has accepted our U.S. IND to begin Phase I testing of MN-029 in cancer patients. We have commenced an open-label study in patients with advanced solid tumors receiving a 10-minute intravenous infusion every 21 days. Groups of patients will be treated in a dose-escalating manner. This trial is designed to study the safety and metabolism of a single dose of MN-029 when administered intravenously to patients with advanced solid tumors. In addition, this first clinical

study will include data on the effect of MN-029 on tumor blood flow and size. We anticipate initiating a second Phase I clinical trial utilizing a weekly intravenous treatment regimen for three weeks followed by a two-week recovery period.

Partnering Programs

MN-001 for Asthma

Disease Overview. Asthma is a chronic inflammatory disease of the lungs in which symptom control is the key to effective disease management. Both alleviation of acute asthmatic symptoms and blocking of late phase inflammation are important to asthma therapy. The asthma market continues to grow, with approximately 17 million patients in the U.S., according to the FDA. According to a ScripReports publication in July 2002, there are approximately 100 to 150 million asthmatics worldwide. According to Med Ad News, sales of asthma drug treatments exceeded $9 billion in 2003. According to IMS Health Incorporated, a market research organization, inhaled bronchial steroids and leukotriene agents are among the fastest growing therapeutic categories in the United States for asthma, with sales growth of 53% and 26%, respectively, from 2002 to 2003. Worldwide sales of the leading leukotriene antagonist for the treatment of asthma were $2 billion in 2003, a 35% increase over 2002 sales.

MN-001. MN-001 is a novel compound for the treatment of bronchial asthma. We have licensed MN-001 from Kyorin Pharmaceutical. Pre-clinical studies conducted by Kyorin Pharmaceutical and us suggest that MN-001 combines the positive attributes of the leukotriene antagonists and inhaled steroids while maintaining an acceptable safety profile. Pre-clinical animal pharmacology studies have demonstrated that MN-001 inhibits airway hyper-reactivity through a reduction of airway inflammation. MN-001 also has been demonstrated to affect many of the downstream mechanisms activated by mast cell degranulation, which is the release of chemicals that cause inflammation. It is also a potent inhibitor of pro-inflammatory enzymes and prevents migration of inflammatory cells to the lungs. In addition, MN-001 has been demonstrated to be more selective than steroids in affecting cells involved in the inflammatory process and not those involved in cellular immunity.

Four Phase I studies of MN-001 have been completed in a total of 77 healthy volunteers by Kyorin Pharmaceuticals and us. MN-001 was well tolerated up to daily doses of 2000 mg and there were no serious adverse events in any of these studies. In addition, a Phase II open-label study was conducted by Kyorin Pharmaceutical in January 1994 in 112 subjects with mild or moderate asthma at doses up to 300 mg twice a day. The efficacy results in this study were inconclusive in terms of symptomatic improvements at the dosage level. Future clinical studies will evaluate the safety and efficacy of MN-001 in asthma patients at doses greater than 300 mg twice a day.

We intend to conduct a multi-center, placebo-controlled, randomized, double-blind, parallel-group study of MN-001 with a four week treatment in mild to moderate asthmatic subjects. Efficacy will be evaluated using standard measures of respiratory function. We submitted an IND to conduct this investigation to the FDA on June 1, 2004. The FDA has requested some additional animal testing to resolve a safety question before the IND becomes effective. Assuming that the issue is satisfactorily resolved, testing will commence upon acceptance of the IND by the FDA.

We believe that the commercialization of MN-001 will require significant resources. As a result, we intend to partner with pharmaceutical or biotechnology companies, either on a global or territorial level, to complete the development and commercialization of MN-001.

MN-305 for Generalized Anxiety Disorder

Disease Overview. The essential characteristic of Generalized Anxiety Disorder is excessive, uncontrollable worry about everyday events. This constant worry affects daily functioning and can cause severe physical symptoms. Generalized Anxiety Disorder can occur with other anxiety disorders, depressive disorders or

substance abuse. Generalized Anxiety Disorder is often difficult to diagnose because it is not triggered by a specific object or situation. The intensity, duration and frequency of the worry are disproportionate to the issue. As a result, Generalized Anxiety Disorder tends to interfere with the performance of tasks and the ability to concentrate. According to the U.S. National Institute of Mental Health, anxiety disorders affect approximately 19 million American adults, of whom 4 million suffer from Generalized Anxiety Disorder. According to a February 2001 report published by Decision Resources, a market research organization, worldwide sales of prescription drugs for the treatment of anxiety disorders are estimated to increase from just under $2 billion in 1999 to almost $3 billion in 2009. Similarly, worldwide sales of prescription drugs for Generalized Anxiety Disorder are estimated to increase from $900 million in 1999 to $1.3 billion in 2009.

A variety of pharmacologic agents are used to manage patients with anxiety disorders. Benzodiazepines were the early mainstays of the treatment of acute anxiety in the late 1960’s. However, their efficacy as a treatment has been inhibited by problems faced by chronic use due to their sedative effects. In the late 1980’s, buspirone was introduced and widely used even though it takes effect slowly. Buspirone was well tolerated and safe. During the late 1990’s, newer anti-depressants, notably the selective serotonin reuptake inhibitors, or SSRIs, and selective norepinephrine reuptake inhibitors, or SNRIs, were increasingly used to treat anxiety as well. While effective, these anti-depressants result in a variety of undesirable side effects, including agitation, insomnia and sexual dysfunction. Also, the SSRIs and SNRIs may take weeks to exert their beneficial effects.

Generally, patients treated with currently available agents do not attain a measurable degree of relief from their symptoms. We believe that there is a significant opportunity for the introduction of new anxiety reducing drugs. Anxiety disorders are the most prevalent of neuropsychiatric conditions, yet are under-diagnosed and consequently under-treated.

MN-305. MN-305 is a serotonin receptor agonist with high affinity and selectivity for the serotonin 5-HT_1A receptor subtype. Drugs that act through this mechanism, such as buspirone, have been proven to be clinically effective in treating Generalized Anxiety Disorder. We licensed MN-305 from Mitsubishi Pharma. MN-305 has been shown to be more potent than buspirone and to show anti-anxiety efficacy in a wide range of pre-clinical models. Pre-clinical and clinical studies conducted by Mitsubishi Pharma also suggest that MN-305 may have a more rapid onset of action than buspirone.

Preliminary evidence of anti-anxiety efficacy has been provided by a six week, open-label, fixed-flexible dose Phase II study conducted by Mitsubishi Pharma in Japan in 61 patients with neurotic disorders. The neurotic disorders included Generalized Anxiety Disorder, panic disorder, agoraphobia, mixed anxiety and depressive disorder and dysthymia. MN-305 was well tolerated, with headaches being the most common side effect in this trial. At the end of the study, the mean Hamilton Rating Scale for Anxiety, or HAM-A, a scale used to measure the intensity of anxiety symptoms, score was reduced by 45.6% compared to the pre-treatment value. Similarly, 53.7% of the patients were rated “Moderately Improved” or better following treatment of MN-305. In addition, several clinical trials conducted by Mitsubishi Pharma in healthy volunteers and patients with anxiety disorders and Major Depressive Disorder have established that MN-305 was well tolerated.

We intend to continue to evaluate the anti-anxiety effects of MN-305 in a Phase II trial in patients with Generalized Anxiety Disorder. The change in the HAM-A score will be assessed as the primary measure of efficacy. The U.S. IND for MN-305 has been transferred to us from Mitsubishi Pharma, enabling us to commence this trial in the first quarter of 2005.

Other Program

Store-Operated Calcium Channel Antagonist Discovery Program

Calcium is involved in a number of key biological processes ranging from control of the structural integrity of membranes to gene expression. Control of these processes are commonly referred to as calcium signaling. Calcium signaling is well known for its regulatory role in many physiological responses. Mutations or functional abnormalities in calcium signaling mechanisms may lead to a wide variety of diseases. We are investigating the

regulation of calcium signaling through store-operated calcium channels, or SOCCs, and inositol-1,4,5-triphosphate, or IP₃, receptors as a novel approach to the treatment of cancer and inflammatory diseases. This research is being conducted in collaboration with Katsuhiko Mikoshiba, M.D., Ph.D., of the University of Tokyo and the Institute of Physical and Chemical Sciences, or RIKEN.

Recent studies support the idea that SOCCs may be responsible for calcium influx during T cell activation. T cells play a major role in the immune system and inflammatory disorders. Similarly, calcium ions also play a central role in the activation and degranulation of tissue mast cells and circulating counterpart basophils. Furthermore, recent studies also suggest that a blockade of SOCCs can slow the proliferation of cancer cells. Thus, modulation of calcium signaling via extracellular SOCCs or intracellular IP₃ receptors may be a novel approach towards identifying new treatments for inflammatory disorders and cancer. We are currently investigating the effects of small molecule modulators of SOCCs on the cells and processes involved in these conditions.

License and Master Services Agreements

Since our inception in 2000, we have executed five license agreements covering our current product candidates. We intend to continue to evaluate and in-license additional compounds, as appropriate. We have also entered into master services agreements with two pharmaceutical companies pursuant to which we provide consulting services. The following is a description of our existing license agreements and currently active master services agreements.

Kissei Pharmaceutical Agreement

On February 25, 2004, we entered into an exclusive license agreement with Kissei Pharmaceutical for the development and commercialization of MN-221. Kissei Pharmaceutical is a fully integrated Japanese pharmaceutical company with 1,469 employees and is listed on the First Section of the Tokyo Stock Exchange. We obtained an exclusive, worldwide (excluding Japan), sublicenseable license to various patent rights and know-how related to MN-221 and other compounds disclosed or included in, or covered by the these patent rights, for all indications, including premature labor. Kissei has an option to enter into a co-promotion agreement with us regarding MN-221. The licensee agreement may be terminated by either party following an uncured breach of any material provision in the agreement by the other party.

Angiogene Agreement

On June 19, 2002, we entered into an exclusive license agreement with Angiogene Pharmaceutical for the development and commercialization of the ANG-600 series of compounds. Angiogene is a privately-held, British drug discovery company. We obtained a worldwide, exclusive, sublicenseable license to the patent rights and know-how related to the ANG-600 series of compounds disclosed in and included or covered by these patents for all indications. MN-029 is one of the ANG-600 series compounds covered by this license. The license agreement may be terminated by either party following an uncured breach of any material provision in the agreement by the other party.

Kyorin Agreement

On March 14, 2002, we entered into an exclusive license agreement with Kyorin Pharmaceutical for the development and commercialization of MN-001. Kyorin Pharmaceutical is a fully integrated Japanese pharmaceutical company with 1,597 employees and is listed on the First Section of the Tokyo Stock Exchange. We obtained an exclusive, worldwide (excluding Japan, China, South Korea, and Taiwan) sublicenseable license to the patent rights and know-how related to MN-001 and its active metabolite disclosed and included or covered by these patents, in all indications except for ophthalmic solution formulations. The license agreement may be terminated by either party following an uncured breach of any material provision in the agreement by the other party.

Mitsubishi Agreement

On April 27, 2004, we entered into an exclusive license agreement with Mitsubishi Pharma Corporation for the development and commercialization of MN-305. Mitsubishi Pharma is a fully integrated Japanese pharmaceutical company with 4,175 employees and is listed on the First Section of the Tokyo Stock Exchange. We obtained an exclusive, worldwide (excluding Japan, Singapore, Brunei, Thailand, Malaysia, Indonesia, the Philippines, Vietnam, Bangladesh, Pakistan, South Korea, China and Taiwan), sublicenseable license to the patent rights and know-how related to MN-305 and its active metabolite disclosed and included or covered by these patents for all indications except for ophthalmic solution formulations. The license agreement may be terminated by either party following an uncured breach of any material provision in the agreement by the other party.

RIKEN Agreement

On June 1, 2003, we entered into an exclusive license with RIKEN, also known as the Institute of Physical and Chemical Science, and Professor Katsuhiko Mikoshiba for the development and commercialization of certain polypeptides and their homologs and analogs. Specifically, we are investigating the regulation of calcium signaling through store-operated calcium channels, or SOCCs, and inositol-1,4,5-triphosphate, or IP₃, receptors as a novel approach to the treatment of cancer and inflammatory diseases. We obtained an exclusive, worldwide sublicenseable license to the patent rights and know-how on IP₃-binding polypeptides and their homologs and analogs in all indications. RIKEN is a non-profit research institute with an annual budget of over $750 million. The license agreement may be terminated by either party following an uncured breach of any material provision in the agreement by the other party.

Asahi Kasei Master Services Agreement

On December 1, 2003, we entered into a master services agreement with Asahi Kasei Pharma Corporation, a mid-sized Japanese pharmaceutical company focused on the discovery, development and commercialization of therapeutic agents. We provide Asahi with consulting and contract management services in connection with the development of pharmaceutical products. Under the agreement, we are currently working on one compound. The agreement currently generates consulting revenue for us and may serve as a prelude to in-licensing of the compound currently being tested and other Asahi compounds.

The master services agreement may be terminated by either party following an uncured default of its material obligations under the agreement. Either party may terminate the agreement upon three months’ written notice. In addition, Asahi may terminate any project-specific addendum to the agreement immediately at any time upon written notice.

Argenes Master Services Agreement

On June 25, 2004, we entered into a master services agreement with Argenes Inc., a mid-sized Japanese pharmaceutical company focused on the discovery, development and commercialization of therapeutic agents. We provide Argenes with consulting and contract management services in connection with the development of pharmaceutical products. Under the agreement, we are currently working on one compound. The agreement may serve as a prelude to in-licensing of the compound currently being tested and other Argenes compounds.

The master services agreement may be terminated by either party following an uncured default of its material obligations under the agreement. Either party may terminate the agreement upon three months’ written notice. In addition, Argenes may terminate any project-specific addendum to the agreement immediately at any time upon written notice.

Sales and Marketing

We currently have no marketing and sales capability. Within the United States, we intend to develop a specialty product-driven marketing and sales organization to promote our strategic core program products, as

well as to co-promote products from our partnering programs. The size and other features of our marketing and sales organization will be influenced by the timing of regulatory approvals for our products, the willingness of our partners to agree to co-promotion and the investment involved.

We believe that a two-stage strategy for the development of a marketing and sales capability is desirable. Initially, we intend to utilize a contract sales organization, or CSO, to provide the necessary field sales management and representation for the promotion of the first core product which is approved for marketing and distribution. The CSO’s field personnel will be managed by our own marketing, sales management and sales support staff, which will be responsible for developing all promotional and training materials, devising advertising campaigns, creating medical education materials and programs and constructing databases for territory and customer management. Our marketing and sales organization, which will be in place one year prior to market introduction of our core products, will also be responsible for all pre-launch activities, mainly the preparation of materials previously described.

One year after the commercial launch of our first product, the second stage of the strategy will evolve, as we directly employ the CSO field personnel. We will then have the flexibility to expand and re-deploy the sales organization as needed. Working with the CSO initially and independently thereafter, we will ensure that the sales force and its management will be experienced and fully familiar with selling to specialists and the hospital environment. We also intend to provide appropriate sales force coverage for managed care organizations, government and institutional accounts and opinion-leading physicians.

As new products are approved for marketing, either from our strategic core programs or from the partnering programs as a result of co-promotion agreements, we may choose to increase our marketing and sales capabilities. Through co-promotion, for example, we may have the option of selling to different physician specialties. It is possible that through our continuing emphasis on in-licensing, additional products will be added to our strategic core programs and/or partnering programs that will afford selling opportunities. We intend to seek product co-promotion opportunities outside of our strategic core and partnering programs to further strengthen our marketing and sales organization.

Manufacturing

We rely on third parties to manufacture bulk compounds and finished investigational medicines for research, development, pre-clinical and clinical trials. We currently engage Torcan Chemical and Regis Technologies for the manufacture of small-scale batches of MN-001 and MN-029 for clinical trials, respectively. We currently engage Patheon to manufacture finished investigational preparations of MN-001, MN-305 and MN-221 for use in clinical trials. We currently engage Fulcrum Pharma Developments to manufacture finished investigational preparations of MN-029 for use in clinical trials. We expect to continue to rely on third parties for the manufacture and distribution of products approved for commercial sale. Drugs must be manufactured in facilities and by processes that comply with the FDA and other regulations. Our third-party manufacturers and distributors are also subject to extensive governmental regulation. The FDA mandates that drugs be manufactured, packaged and labeled in conformity with cGMP. In complying with cGMP regulations, manufacturers must continue to expend time, money and effort in production, record keeping and quality control to ensure that products they produce meet applicable specifications and other requirements to ensure product safety and efficacy.

We believe that there are several manufacturing sources available on commercially reasonable terms to meet our clinical and any future commercial production requirements.

Under each of our agreements with our third-party manufacturers, the manufacturers:

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are required to supply products to us based on purchase orders we provide to them;

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provide representations and warranties regarding the compliance with cGMP of the products they make for us;

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are required to operate their facilities in compliance with all legal and regulatory requirements; and

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are permitted to terminate the agreement only in the event that we materially breach the agreement or become insolvent.

Intellectual Property

In general, we seek to procure patent protection for our anticipated products, or obtain such protection from the relevant patents owned by our licensors. To date we have rights under several patents, issued both in the United States or outside the United States, and numerous pending patent applications throughout most of the countries of the industrialized world. Such patents and pending patent applications contain claims directed to, among other things, compounds, compositions, methods of use and/or methods of manufacture. The following is a description of our intellectual property rights:

MN-221

We hold an exclusive, worldwide sublicenseable license, excluding Japan, from Kissei Pharmaceutical to patents and pending patent applications related to MN-221, which covers compositions of matter and uses of MN-221. A U.S. composition of matter patent was issued in October 2000. Corresponding composition patents are issued in many European and Asian countries. An additional use patent application is pending worldwide. The composition of matter patent is set to expire no earlier than February 2014. Extension of the patent’s term might be available under the patent term restoration provisions of the Hatch-Waxman Act.

MN-001

We hold an exclusive, worldwide sublicenseable license, excluding Japan, China, South Korea and Taiwan, from Kyorin Pharmaceutical to patents related to MN-001, covering compositions of matter of MN-001 and its active metabolite, MN-002. A U.S. composition of matter patent for MN-001 was issued in January 1991 (set to expire on February 23, 2009) and in March 1994 for MN-002 (set to expire on December 30, 2011). Corresponding composition patents are issued in many European and Asian countries. Additional composition, use and process patent applications are pending worldwide. In addition to any proprietary rights provided by these patents, we intend to rely on the provisions of the Hatch-Waxman Act to obtain a period of marketing exclusivity in the United States if the FDA approves MN-001 for marketing in the United States, although there is no assurance market exclusivity will be granted.

MN-029

We hold an exclusive, worldwide sublicenseable license from Angiogene Pharmaceuticals to patents related to MN-029, covering compositions of matter of MN-029 and its analogs known as the ANG-600 series of compounds. A U.S. composition of matter patent covering MN-029 was issued in November 2003 (set to expire on January 14, 2020). Corresponding composition patents are pending in the rest of the world. Additional methods of use patent applications are pending worldwide.

MN-305

We hold an exclusive, worldwide sublicenseable license, excluding Japan, Singapore, Brunei, Thailand, Malaysia, Indonesia, the Philippines, Vietnam, Bangladesh, Pakistan, South Korea, China and Taiwan, for MN-305 from Mitsubishi Pharma Corporation. A U.S. composition of matter patent covering MN-305 was issued in December 1992 (set to expire on March 14, 2011). Corresponding composition patents are issued in most of the European countries and in Canada. An additional three methods of use patents are also issued in the United States and major European countries. In the United States, these additional patents are set to expire in October 2016, May 2018 and August 2018, respectively. In addition to any proprietary rights provided by these patents, we intend to rely on the provisions of the Hatch-Waxman Act to obtain a period of marketing exclusivity in the United States, if the FDA approves the marketing of MN-305, although there is no assurance that market exclusivity will be granted.

IP₃ binding polypeptides

We hold an exclusive, worldwide sublicenseable license to patents, patent applications and know-how related to IP₃-binding polypeptides from RIKEN and Professor Katsuhiko Mikoshiba. A U.S. composition of matter patent was issued in October 2002. Corresponding patent applications are pending in the rest of the world. The U.S. patent, which is directed to isolated nucleic acids, recombinant vectors, transformants, and methods of producing polypeptides, is set to expire in August 2019.

Our proposed commercial activities may conflict with patents, which have been or may be granted to competitors, universities and/or others. Some third parties could bring legal action against us, our licensors or our sublicensees claiming patent infringement, and could seek damages or enjoin manufacturing and marketing of the affected product or its use or the use of a process for the manufacturing of such products. If any such actions were to be successful, in addition to any potential liability for indemnification, damages and attorneys’ fees in certain cases, we could be required to obtain a license, which may not be available, in order to continue to manufacture, use or market the affected product. We also rely upon unpatented proprietary technology because, in some cases, our interest would be better served by reliance on trade secrets or confidentiality agreements than by patents. However, others may independently develop substantially equivalent proprietary information and techniques or gain access to or disclose such proprietary technology. We may not be able to meaningfully protect our rights in such unpatented proprietary technology. We may also conduct research on other pharmaceutical compounds or technologies, the rights to which may be held by, or be subject to patent rights of, third parties. Accordingly, if products based on such research are commercialized, such commercial activities may infringe patents or other rights, which may require us to obtain a license to such patents or other rights.

There can be no assurance that patent applications filed by us or others, in which we have an interest as assignee, licensee or prospective licensee, will result in patents being granted or that, if granted, any of such patents will afford protection against competitors with similar technology or products, or could not be circumvented or challenged. In addition, if we develop certain products that are not covered by any patents, we will be dependent on obtaining market exclusivity under the data exclusivity provisions of the Hatch-Waxman Act for such products. If we are unable to obtain strong proprietary rights protection for our products after obtaining regulatory clearance, competitors may be able to market competing generic products by taking advantage of an abbreviated procedure for obtaining regulatory clearance, including the ability to demonstrate equivalency to our product(s) without being required to conduct lengthy clinical trials. Our license agreements provide for reduced royalties, or, in some cases, foregone royalties in the event of generic competition.

Government Regulation

Government authorities in the United States and in other countries extensively regulate, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution, marketing, and export and import of pharmaceutical products such as those we are developing. Failure to comply with applicable requirements, both before and after approval, may subject us to administrative and judicial sanctions, such as a delay in approving or refusal to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, and/or criminal prosecution. Our drug candidates may prove not to be safe or effective, and may not receive regulatory approvals or be successfully commercialized.

U.S. Regulatory Approval. In the United States, drugs and drug testing are regulated by the FDA under the Food, Drug and Cosmetic Act, as well as state and local government authorities. Before our products may be marketed in the United States, they must be approved by the FDA. Our product candidates are in the early stages of testing and none has been approved. The steps required before a drug can be approved generally involve the following:

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pre-clinical laboratory and animal tests performed under the FDA’s Good Laboratory Practices regulations;

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submission and acceptance of IND application, which must become effective before clinical trials may begin in the United States;

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adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug candidate in our intended use;

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development of manufacturing processes which conform to FDA-mandated cGMPs and completion of our FDA inspection to assess compliance; and

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FDA review and approval of a New Drug Application, or NDA.

The testing and approval process requires substantial time, effort, and financial resources. We cannot be certain that any approval will be granted on a timely basis, if at all.

Pre-clinical tests. Pre-clinical tests include laboratory evaluation of the drug candidate, its chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of the drug candidate. The results of the pre-clinical tests, together with manufacturing information, analytical data and other available information about the drug candidate, are submitted to the FDA as part of an IND application. Pre-clinical tests and studies can take several years to complete, and despite completion of those tests and studies the FDA may not permit clinical testing to begin.

The IND Process. An IND application must be effective to administer an investigational drug to humans. An IND must be effective prior to interstate shipment and administration of any new drug that is not the subject of an approved NDA. The FDA requires a 30-day waiting period after the filing of each IND application before clinical trials may begin. This waiting period is designed to allow the FDA to review the IND application to determine whether human research subjects will be exposed to unreasonable health risks. At any time during this 30-day period or at any time thereafter, the FDA may raise concerns or questions about the conduct of the trials as outlined in the IND application and impose a clinical hold. In this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin or continue. The IND application process may become extremely costly and substantially delay development of our products. Moreover, positive results in pre-clinical tests will not necessarily indicate positive results in clinical trials.

Prior to initiation of clinical studies, an independent Institutional Review Board, or IRB, at each medical site proposing to conduct the clinical trials must review and approve each study protocol and study subjects must provide informed consent.

Clinical Trials. Human clinical trials are typically conducted in three sequential phases that may overlap:

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Phase I: The drug is initially introduced into healthy human subjects or patients and tested for safety, dosage tolerance, absorption, distribution, excretion and metabolism.

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Phase II: The drug is introduced into a limited patient population to: assess the efficacy of the drug in specific, targeted indications; assess dosage tolerance and optimal dosage, and identify possible adverse effects and safety risks.

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Phase III: These are commonly referred to as pivotal studies. If a compound is found to have an acceptable safety profile and to be potentially effective in Phase II trials, new clinical trials will be initiated to further demonstrate clinical efficacy and safety within an expanded and diverse patient population at geographically dispersed clinical study sites.

We cannot be certain that we will successfully complete Phase I, Phase II or Phase III testing of our drug candidates within any specific time period, if at all. Clinical testing must meet requirements for the IRB, oversight, informed consent and good clinical practices. The FDA and the IRB at each institution at which a clinical trial is being performed, may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health risk.

The NDA Process. If clinical trials are successful, the next step in the drug regulatory approval process is the preparation and submission to the FDA of an NDA. The NDA is the vehicle through which drug sponsors formally propose that the FDA approve a new pharmaceutical product for marketing and sale in the United States. The NDA must contain a description of the manufacturing process and quality control methods, as well as results of pre-clinical tests, toxicology studies, clinical trials and proposed labeling, among other things. A substantial user fee must also be paid with the NDA, unless an exemption applies. Every new drug must be the subject of an approved NDA before U.S. commercialization.

Upon submission of the NDA, the FDA will make a threshold determination of whether the application is sufficiently complete to permit review, and if not will issue a refuse to file letter. If the application is accepted for filing, the FDA will attempt to review and take action on the application in accordance with performance goal commitments the FDA has made in connection with the user fee law. These timing commitments will vary depending on whether an NDA is for a priority drug or not, and in any event are not a guarantee that an application will be approved or even acted upon by any specific deadline. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee. The FDA may deny or delay approval of applications that do not meet applicable regulatory criteria or if the FDA determines that the clinical data do not adequately establish the safety and efficacy of the drug. In addition, the FDA may approve a drug candidate subject to the completion of post-marketing studies, referred to as Phase IV trials, to monitor the effect of the approved product. The FDA may also grant approval with restrictive product labeling, or may impose other restrictions on marketing or distribution such as the adoption of a special risk management plan.

Manufacturing and Post-Marketing Requirements. Once the FDA approves a product, we and our third-party manufacturers are required to comply with a number of post-approval requirements. For example, certain changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims are subject to future FDA review and approval. Advertising and other promotional material must comply with FDA requirements and special requirements apply to any drug samples that are distributed in accordance with the Prescription Drug Marketing Act. The NDA holders and manufacturers of approved products will be subject to continual review and periodic inspections by the FDA and other authorities where applicable, and must comply with ongoing requirements, including the FDA’s cGMP requirements. Once the FDA approves a product, a manufacturer must provide certain updated safety and efficacy information, submit copies of promotional materials to the FDA periodically, and make certain other required reports. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval. Because we intend to contract with third parties for manufacturing of our products, our ability to control third-party compliance with FDA requirements will be limited to contractual remedies and rights of inspection. Failure of third-party manufacturers to comply with cGMPs or other FDA requirements applicable to our products may result in, among other things, total or partial suspension of production, failure of the government to grant approval for marketing, and withdrawal, suspension, or revocation of marketing approvals.

The FDA’s policies may change and additional government regulations may be promulgated which could prevent or delay regulatory approval of our potential products. Moreover, increased attention to the containment of health care costs in the U.S. and in foreign markets could result in new government regulations that could have a material adverse effect on our business. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.

We are also subject to various laws and regulations regarding laboratory practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances in connection with our research.

Foreign Regulatory Approval. We will have to complete approval processes, similar or related to the U.S. approval processes, in virtually every foreign market for our products in order to conduct clinical or pre-clinical

research and to commercialize our drug candidates in those countries. The approval procedures and the time required for approvals vary from country to country and may involve additional testing. Foreign approvals may not be granted on a timely basis, or at all. In addition, regulatory approval of prices is required in most countries other than the United States. We face the risk that the resulting prices would be insufficient to generate an acceptable return to us or our collaborators.

Similar to the U.S. regulatory framework, the various phases of pre-clinical and clinical research are subject to significant regulatory controls within the European Union. Variations among national regimes exist. However, most jurisdictions require regulatory and institutional review board approval of interventional clinical trials. Most European regulators also require the submission of adverse event reports during a study and a copy of the final study report.

Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized or decentralized procedure. The centralized procedure is currently mandatory for products developed by means of a biotechnological process and optional for new active substances and other “innovative medicinal products with novel characteristics.” It provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit applications in other European Union member states, requesting them to mutually recognize the marketing authorization already granted. Within ninety days of receiving the applications and assessment report, each member state must decide whether to recognize the existing approval.

Where possible, we will strive to choose the European regulatory filing route that will most rapidly enable us to obtain the needed regulatory approvals. However, the chosen regulatory strategy may not secure regulatory approvals or approvals of the chosen product indications. In addition, these approvals, if obtained, may take longer than anticipated.

Other Regulatory Matters. In the United States, our manufacturing, sales, promotion, and other activities following any product approval are subject to regulation by regulatory authorities in addition to the FDA, including the Federal Trade Commission, the Department of Justice, the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and Human Services, and state and local governments. Among other laws and requirements, our sales, marketing and scientific/educational programs will need to comply with the anti-kickback provisions of the Social Security Act, the False Claims Act and similar state laws. Our pricing and rebate programs will need to comply with pricing and reimbursement rules, including the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply.

All of our activities are potentially subject to federal and state consumer protection and unfair competition laws. Finally, certain jurisdictions have other trade regulations from time to time to which our business is subject such as technology or environmental export controls and political trade embargoes.

Competition

The development and commercialization of new drugs is competitive and we will face competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Our competitors may develop or market products or other novel technologies that are more effective, safer or less costly than any that have been or are being developed by us, or may obtain regulatory approval for their products more rapidly than we may obtain approval for ours.

The acquisition or licensing of pharmaceutical products is also very competitive, and a number of more established companies, which have acknowledged strategies to license or acquire products, may have competitive advantages as may other emerging companies taking similar or different approaches to product acquisitions. In

addition, a number of established research-based pharmaceutical and biotechnology companies may acquire products in late stages of development to augment their internal product lines. These established companies may have a competitive advantage over us due to their size, cash flows and institutional experience.

Many of our competitors will have substantially greater financial, technical and human resources than we have. Additional mergers and acquisitions in the pharmaceutical industry may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances made in the commercial applicability of technologies and greater availability of capital for investment in these fields. Our success will be based in part on our ability to build and actively manage a portfolio of drugs that addresses unmet medical needs and create value in patient therapy.

Employees

We have succeeded in bringing together an experienced and cohesive management and support team, with core competencies in general management, clinical development, regulatory affairs and corporate development. As of September 15, 2004, we had 15 full-time employees, five of whom hold Ph.D.s, M.D.s or equivalent degrees. A total of seven employees were engaged in research and development, three were in corporate development and five were in administration and finance. We believe that our relations with our employees are good and we have no history of work stoppages.

Facilities

We lease approximately 11,375 square feet of office space at our headquarters at 4350 La Jolla Village Drive in San Diego, California. We believe that our current facilities are adequate for our needs for the near future and that, as it is needed, suitable additional space will be available to accommodate expansion of our operations on commercially reasonable terms.

Litigation

We are not currently a party to any material legal proceedings in the federal, provincial, or state courts of any jurisdiction.

MANAGEMENT

Executive Officers, Officers and Directors

Our executive officers, officers and directors and their ages as of September 30, 2004 were as follows:


Name	Age	Position(s)
Takashi Kiyoizumi, M.D., Ph.D.	47	President, Chief Executive Officer and Director
Brian Anderson	57	Executive Vice President, Corporate Development
Richard E. Gammans, Ph.D.	55	Executive Vice President, Clinical Research
Kenneth W. Locke, Ph.D.	47	Senior Vice President, Portfolio Management
Mark Lotz	52	Vice President, Regulatory Affairs
Joji Suzuki, M.D., Ph.D.	42	Vice President, Finance
Yuichi Iwaki, M.D., Ph.D.	55	Chairman of the Board and Director
John K. A. Prendergast, Ph.D.^(1)(2)(3)	50	Director
Daniel Vapnek, Ph.D.^(1)(2)(3)	65	Director
Hideki Nagao^(1)(2)(3)	48	Director

(1)	Member of the compensation committee.

(2)	Member of the audit committee.

(3)	Member of the nominating and corporate governance committee.

Takashi Kiyoizumi, M.D., Ph.D. originally co-founded MediciNova with Dr. Iwaki and has served as our President and Chief Executive Officer and member of the Board of Director since our inception. From 2000 to 2002, Dr. Kiyoizumi served as President and Chief Executive Officer of Tanabe Research Laboratories U.S.A., Inc. From 1991, Dr. Kiyoizumi held corporate management positions at ImmuLogic Pharmaceutical Corporation and Interneuron Pharmaceuticals, Inc., where he was most recently the Senior Vice President of Business Development and Strategic Planning from 1998 to 2000. From 1981 prior to his tenure in the biopharmaceutical industry, Dr. Kiyoizumi was an academic physician and a board-certified plastic and reconstructive surgeon. Dr. Kiyoizumi earned his M.D. and Ph.D. degrees from the Keio University School of Medicine in Tokyo, where he was an Assistant Professor of Plastic and Reconstructive Surgery. He holds a Master of Science in Management from the Sloan School of Management at Massachusetts Institute of Technology.

Brian Anderson has served as our Executive Vice President, Corporate Development since April 2004, when he joined MediciNova. Previously he was an advisor and consultant to the investor relations firm, Montridge, LLC. From 1998 to 2002, Mr. Anderson was President and CEO of Cognetix, Inc., a privately held biotechnology company in Salt Lake City, Utah. Earlier, Mr. Anderson was the Senior Vice President of Marketing and Commercial Development at Interneuron Pharmaceuticals and from 1987 to 1995 he held various executive positions in marketing, business development and strategic planning at Bristol-Myers Squibb. He began his career in the pharmaceutical industry with the Upjohn Company of Canada, where he progressed through a series of sales, sales management and marketing management assignments. Mr. Anderson is a graduate of the University of Manitoba. He sits on the boards of two biotechnology companies, Oragenics, Inc. and Omni Genetics, Inc.

Richard E. Gammans, Ph.D. has served as our Executive Vice President, Clinical Research since June 2004 when he joined MediciNova. Prior to joining us, he was Executive Vice President, Research and Development at Incara Pharmaceuticals. From 1994 to 2000 he was Senior Vice President, Clinical Research at Interneuron Pharmaceuticals, where he directed the company’s clinical development programs in stroke and anxiety disorders. Prior to joining Interneuron, Dr. Gammans spent 14 years at Bristol-Myers Squibb, where he began as a Senior Scientist and progressed through a series of increasingly more senior positions in toxicology,

pharmacokinetics and clinical pharmacology, to assume the position of Director, CNS Clinical Research and responsibility as Global Project Director for the anti-depressant, Serzone. Dr. Gammans received his Ph.D. from the University of Georgia School of Pharmacy and holds an M.S. in Management from Purdue University.

Kenneth W. Locke, Ph.D. has served as our Senior Vice President, Portfolio Management since June 2004. Dr. Locke has worked for MediciNova since inception holding progressively positions of Vice President, Research and Senior Vice President, Development Operations & Drug Discovery. Dr. Locke was formerly Vice President of Research at Tanabe Research Laboratories U.S.A., Inc. where he worked since June 2000. Prior to joining Tanabe Research Laboratories, Dr. Locke served as Executive Director, Pre-clinical Development at Interneuron Pharmaceuticals, Inc. He joined Interneuron in 1989 as Manager, Behavioral Neuroscience, taking on positions of increasing responsibility over the next 11 years. Earlier in his career, Dr. Locke headed Hoechst-Roussel Pharmaceuticals’ laboratories for analgesics and anti-inflammatory research as well as Alzheimer’s disease. Dr. Locke holds an Adjunct Associate Professorship of Pharmacology at Massachusetts College of Pharmacy and Allied Health Sciences. Dr. Locke earned an M.S. and Ph.D. in Pharmacology from Emory University School of Medicine.

Mark Lotz has served as our Vice President, Regulatory Affairs since February 2004. Before joining MediciNova, Mr. Lotz was Vice President, Regulatory Affairs with Isis Pharmaceuticals in San Diego, California, where he led both regulatory and quality assurance activities. Prior to that, he spent time in positions of growing authority with Amylin Pharmaceuticals and Abbott Laboratories. He also spent two years as a hospital staff pharmacist in the Midwest. Mr. Lotz holds a Bachelor of Science degree in pharmacy from the St. Louis College of Pharmacy.

Joji Suzuki, M.D., Ph.D. served as our Senior Director, Finance from May 2004 to September 2004 and is now our Vice President, Finance. Dr. Suzuki was formerly Senior Analyst of HSBC Securities Ltd. where he was responsible for the pharmaceutical sector in the Japanese equity market since September 2001. Prior to joining HSBC Securities, he served as Manager, Portfolio Management at the Corporate Planning Office of Nippon Roche K.K., a subsidiary of F. Hoffmann-La Roche, where he was engaged in various R&D projects and corporate decision-making as a member of the Portfolio Strategy Board since January 1999. Dr. Suzuki began his career as a clinician at Keio University School of Medicine in 1988 where he earned his M.D. and Ph.D. He practiced in the arena of Plastic Surgery and Orthopedic Surgery, and researched Healthcare Economics. He holds a Master of Business Administration from INSEAD.

Yuichi Iwaki, M.D., Ph.D. originally co-founded MediciNova with Dr. Kiyoizumi and has served as our Chairman of the Board of Directors since our inception. Dr. Iwaki holds three professorships at the University of Southern California School of Medicine in the Departments of Urology, Surgery and Pathology and has been Director of the Transplantation Immunology and Immunogenetic Laboratory since 1992. He is also a visiting professor at the Nihon University School of Medicine, Kyushu University, Tokyo Women’s Medical School in Japan, and the University of California, Irvine School of Medicine. Prior to joining the faculty at the University of Southern California School of Medicine, Dr. Iwaki held professorships at the University of Pittsburgh School of Medicine in the departments of Surgery and Pathology from 1989 through 1991. He received both his M.D. and Ph.D. degrees from Sapporo Medical School in Sapporo, Japan. Dr. Iwaki is the author of 200 peer-reviewed publications and more than 40 books. He has been advising pharmaceutical companies and venture capital funds regarding research and investment strategies for over 20 years and is a board member of several biotechnology companies, including Avigen, Inc.

John K.A. Prendergast, Ph.D., has served as a director of MediciNova since September 2004. Since 1993, he has served as President of SummerCloud Bay Inc., an independent consulting firm providing services to the biotechnology industry. Dr. Prendergast is a co-founder and director of Avigen, Inc., a Nasdaq listed company, where currently he is a chairman of the Audit, Governance and Compensation Committees. Dr. Prendergast is currently Chairman of the Board of Directors of Palatin Technologies, Inc. and AVAX Technologies, Inc., an over-the-counter traded company, and is currently serving as the Executive Chairman of the board of directors of Antyra, Inc., a privately held biopharmaceutical company. Dr. Prendergast received a M.Sc. and Ph.D. degrees

from the University of New South Wales, Sydney, Australia and a C.S.S. in Administration and Management from Harvard University.

Daniel Vapnek, Ph.D. has served as a director of MediciNova since September 2004. Dr. Vapnek is currently an adjunct professor at the University of California, Santa Barbara. From 1981 through 1999, Dr. Vapnek held various senior research positions at Amgen Inc., a biopharmaceutical company, including Senior Vice President, Research from 1988 to 1996 and Senior Consultant from 1996 to 1999. Prior to joining Amgen, Dr. Vapnek held various professorial positions at the University of Georgia from 1972 to 1981, including Professor of Molecular and Population Genetics, and served as a research associate at the Yale University School of Medicine from 1970 to 1972. Dr. Vapnek is CEO and chairman of the board of directors of Protein Pathways, Inc. and is a director of BioArray Solutions, Inc. and Avigen, Inc., all of which are biotechnology companies. Dr. Vapnek received a Ph.D. in Microbiology and a B.S. in Zoology from the University of Miami.

Hideki Nagao has served as a director of MediciNova since September 2004. Since 1980, he has been employed by the Development Bank of Japan. Mr. Nagao is currently Director General, Department for Technology and Growth Business at Development Bank of Japan. He graduated from the Faculty of Law of Tokyo University.

Board of Directors

Our board of directors currently consists of five members. All directors are elected to hold office until their successors have been elected and qualified or until their earlier death, resignation, disqualification or removal. Effective upon the date of this prospectus, we will divide the terms of office of the directors into three classes:

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Class I, whose term will expire at the annual meeting of stockholders to be held in 2005;

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Class II, whose term will expire at the annul meeting of stockholders to be held in 2006; and

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Class III, whose term will expire at the annual meeting of stockholders to be held in 2007.

Upon the date of this prospectus, Class I will consist of , Class II will consist of and Class III will consist of . Each of Messrs. Prendergast, Vapnek and Nagao are independent directors as defined by Rule 4200(a)(15) of the National Association of Securities Dealers listing standards.

At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire will serve from the time of election and qualification until the third annual meeting following election and until their successors are duly elected and qualified. The authorized number of directors may be changed by resolution of the board. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. Vacancies on the board can be filled by resolution of the board of directors. The classification of the board of directors may have the effect of delaying or preventing changes in control or management of our company.

Board Committees

Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee, each of which has the composition and responsibilities described below. As of the date of this prospectus, all of the members of our committees will be independent directors under the rules of the SEC and The Nasdaq Stock Market. Although we are not currently subject to the rules of The Nasdaq Stock Market, we intend to comply with Nasdaq’s rules of board independence and governance in connection with our listing on the Mothers Market of the Tokyo Stock Exchange.

Audit Committee. As of the date of this prospectus, the audit committee will consist of Messrs. Prendergast, Vapnek and Nagao, with Dr. Prendergast serving as the Chairman of the committee. The audit committee provides assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving

our accounting, auditing, financial reporting, internal control and legal compliance functions by approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal accounting controls. The audit committee will be responsible for the appointment, compensation, retention and oversight of our independent accountants and will ensure that the accountants are independent of management. Dr. Prendergast is our audit committee financial expert as currently defined under the rules of the SEC.

Compensation Committee. As of the date of this prospectus, the compensation committee will consist of Messrs. Prendergast, Vapnek and Nagao, each of whom is a non-management member of our board of directors, with Dr. Prendergast serving as the Chairman of the committee. The compensation committee determines our general compensation policies and the compensation provided to our directors and officers. The compensation committee also reviews and determines bonuses for our officers and other employees. In addition, the compensation committee reviews and determines equity based compensation for our directors, officers, employees and consultants and administers our stock option plans and employee stock purchase plan.

Nominating and Corporate Governance Committee. As of the date of this prospectus, the nominating and corporate governance committee will consist of Messrs. Prendergast, Vapnek and Nagao, with Dr. Prendergast serving as the Chairman of the committee. The nominating and corporate governance committee is responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board and for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate governance matters.

Director Compensation

Prior to 2004, we have not paid our directors for their services as directors. During September 2004, each of Messrs. Prendergast and Vapnek received compensation in the amount of $20,000 for service as a director. None of our other directors have received compensation for their services as directors. Mr. Nagao is prohibited by his employment arrangements with the Development Bank of Japan from receiving any compensation for his services as a member of our board.

Following the completion of this offering, we intend to pay our non-employee board members, other than Mr. Nagao, the following fees related to their service on our board of directors, assuming that they attend at least 80% of the meetings of our board of directors or the committees on which they are members:

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an initial fee of $20,000 for agreeing to be on the board of directors; and

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an annual retainer of $20,000.

In the event that a board member attends less than 80% of such meetings, the board member would receive 25% of the cash compensation he or she would otherwise receive.

In addition, our non-employee, non-consultant directors, other than Mr. Nagao, whose employment arrangements with the Development Bank of Japan do not permit him to receive compensation for his services as a member our board, will receive nondiscretionary, automatic grants of nonstatutory stock options. A non-employee director will be granted automatically an initial option to purchase 10,000 shares upon first becoming a member of our board of directors. The initial option would be fully vested at the time of grant. Immediately after each of our regularly scheduled annual meeting of stockholders, each non-employee director, other than Mr. Nagao, will be granted automatically a nonstatutory option to purchase 10,000 shares of our common stock, provided the director has served on our board for at least six months. Each annual option will vest and become fully exercisable on the date which is six months after the date of the grant. The options granted to non-employee directors will have a per share exercise price equal to 100% of the fair market value of the underlying shares on the date of grant and will become fully vested if we are subject to a change of control.

We reimburse our directors for reasonable expenses in connection with attendance at board and committee meetings.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee at any time has been one of our officers or employees. No interlocking relationship exists, or has existed in the past, between our board or compensation committee and the board or compensation committee of any other company.

Executive Officers

Our chief executive officer serves at the discretion of our board and holds office until his or her successor is appointed or until his or her earlier resignation or removal. Our remaining executive officers and officers report to our chief executive officer. There are no family relationships among any of our directors, executive officers or officers.

Executive Compensation

The following table sets forth all of the compensation awarded to, earned by or paid to each individual who served as an executive officer in 2003 and whose salary and bonus exceeded $100,000 for services rendered in all capacities to us during 2003. Since many of our executive officers joined us during 2004, the following table also sets forth the compensation payable to our four most highly compensated executive officers, in addition to those listed as executive officers in 2003, stated as an annual amount, and any bonuses or other compensation paid and any options granted to such executive officers during 2004, measured as of June 30, 2004. We refer to all of these officers in this prospective as the named executive officers. The compensation described in this table does not include medical, group life insurance or other benefits which are generally available to all of our salaried employees.

Summary Compensation Table


		Annual Compensation							Long-Term Compensation Awards
Name and Principal Position(s)	Year	Salary ($)		Bonus ($)		Other Annual Compensation ($)			Securities Underlying Options (#)
Takashi Kiyoizumi, M.D., Ph.D. President and Chief Executive Officer	2003	$	316,663	$	47,500		—		—
Brian Anderson⁽¹⁾ Executive Vice President, Corporate Development	2004	$	250,000		—	$	2,428	⁽²⁾	200,000
Richard E. Gammans, Ph.D.⁽¹⁾ Executive Vice President, Clinical Research	2004	$	239,000		—		—		160,000
Kenneth W. Locke, Ph.D. Senior Vice President, Portfolio Management	2003	$	210,000	$	42,000		—		—
Mark Lotz⁽¹⁾ Vice President, Regulatory Affairs	2004	$	210,000		—		—		120,000
Joji Suzuki, M.D., Ph.D.⁽¹⁾ Vice President, Finance	2004	$	200,000		—		—		130,000

(1)	Hired in 2004. Chart illustrates annual salaries to be paid prospectively under employment agreements and long term compensation awards granted in 2004.

(2)	Allowance for housing expenses paid by us.

Stock Options

The following tables summarize option grants and exercises during the year ended December 31, 2003 to or by our named executive officers, and the value of the options held by such persons as of December 31, 2003, including the potential realizable value over the ten-year term of the options, based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These assumed rates of appreciation comply with the rules of the SEC and do not represent our estimate or projection of the future common stock price. There can be no assurance that any of the values reflected in the table will be achieved. We have not granted any stock appreciation rights.

From September 2000 through September 30, 2004, we granted options to purchase up to an aggregate of 1,510,000 shares, net of cancellations, under our 2000 General Stock Incentive Plan. All options were granted at exercise prices at or above the fair market value of our common stock on the date of grant, as determined in good faith by our board of directors. Option shares generally vest over four years.

We did not grant any stock options in 2003.

Aggregate Option Exercises in 2003 and Option Values at December 31, 2003

The following table describes for the named executive officers their option exercises for the year ended December 31, 2003, and exercisable and unexercisable options held by them as of December 31, 2003. The value realized and the value of unexercised in-the-money options at December 31, 2003 are based on an assumed initial public offering price of $ per share, which is the midpoint of our expected initial offering range, less the per share exercise price, multiplied by the number of shares issued or issuable, as the case may be, upon exercise of the option. All options were granted under our 2000 General Stock Incentive Plan.

Number of Securities

Underlying Unexercised

Options at December 31,

2003 (#)

Value of Unexercised

In-the-Money Options at

December 31, 2003 ($)

Name

Shares Acquired
on Exercise (#)

Value
Realized ($)

Exercisable

Unexercisable

Exercisable

Unexercisable

Kenneth W. Locke, Ph.D.

Senior Vice President,

Portfolio Management

—

180,000

No options were exercised by any of the named executive officers during the fiscal year ended December 31, 2003.

Options Granted in the Current Fiscal Year

The following table provides summary information concerning individual grants of options to purchase our common stock during the current fiscal year to our named executive officers and non-employee directors. The exercise price per share at which each option was issued was the fair market value of our common stock on the date of the grant, as determined by our board of directors.

2004 Option Grants


Name		2004 Option Grants to Date
Executive Officers⁽¹⁾
Brian Anderson		200,000
Richard E. Gammans, Ph.D.		160,000
Kenneth W. Locke, Ph.D.		120,000
Mark Lotz		120,000
Joji Suzuki, M.D., Ph.D.		130,000
Non-Employee Directors⁽²⁾
John K. A. Prendergast, Ph.D.		10,000
Daniel Vapnek, Ph.D.		10,000

(1)	All options granted to executive officers vest 25% one year from the date of the grant of the option and the remaining 75% vests monthly for a period of three years commencing on the one year anniversary of the date of the grant of the option.

(2)	All options granted to our non-employee directors are fully vested upon the date on which our board of directors approved the grant.

Stock Plans

2000 General Stock Incentive Plan

In September 2000, we adopted our 2000 General Stock Incentive Plan. The plan is administered by the board of directors although the board may delegate the authority to administer the plan to a committee of directors or to one or more officers, provided, however, that committee functions may not be delegated to officers to the extent that option grants relate to persons who are subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934, as amended. A total of 2,000,000 shares of common stock are authorized for issuance under the 2000 General Stock Incentive Plan.

Shares subject to stock options that have expired, been cancelled or have otherwise terminated without having been exercised in full will again become available for grant. The 2000 General Stock Incentive Plan permits the grant of options to our directors, officers, other employees and consultants. Options may be either incentive stock options to employees within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended or nonstatutory stock options. The maximum term of options granted under the plan is ten years. Except in specified circumstances, no person may be granted more than 600,000 shares of common stock in any 12-month period. Options granted under the 2000 General Stock Incentive Plan are generally nontransferable and vest at the rate determined by the administrator of the plan. Options granted under the 2000 General Stock Option Plan vest based on periods determined by our board of directors which has been four years for employees and other option recipients.

The 2000 General Stock Incentive Plan provides that in the event of a recapitalization, stock split or similar transaction, we will make appropriate adjustments in order to preserve the benefits of options outstanding under the plan. If we are involved in a merger, consolidation or other reorganization, outstanding options granted under the 2000 General Stock Incentive Plan will be subject to the agreement of merger or reorganization.

As of September 30, 2004, options to purchase a total of 1,510,000 shares of common stock were outstanding under the 2000 General Stock Incentive Plan at a weighted average exercise price of $1.00 per share. No additional options will be issued under the 2000 General Stock Incentive Plan following the date of this prospectus.

2004 Stock Incentive Plan

General. The 2004 Stock Incentive Plan is intended to serve as the successor program to our 2000 General Stock Incentive Plan. The 2004 Stock Incentive Plan was adopted by our board of directors and approved by our stockholders on , 2004, and will become effective upon the completion of this offering.

Administration. The 2004 Stock Incentive Plan will be administered by our compensation committee. The 2004 Stock Incentive Plan provides for the grant of options to purchase shares of common stock, restricted stock, stock appreciation rights and stock units. Incentive stock options may be granted to new employees. Nonstatutory stock options and other stock-based awards may be granted to employees, non-employee directors, advisors and consultants.

The board of directors will be able to amend or modify the 2004 Stock Incentive Plan at any time, with stockholder approval, if required.

Authorized Shares. shares of common stock have been authorized for issuance under the 2004 Stock Incentive Plan. However, no participant in the 2004 Stock Incentive Plan can receive option grants or stock appreciation rights for more than shares total in any calendar year, or for more than shares total in the first year of service. The number of shares reserved for issuance under the 2004 Stock Incentive Plan will be increased on the first day of each of our fiscal years from 2006 through 2014 by the lesser of:

•

shares;

•

% of our outstanding common stock on the last day of the immediately preceding fiscal year; or

•

the number of shares determined by the board of directors.

Plan Features

Under the 2004 Stock Incentive Plan:

•

We expect that options granted to optionees other than outside directors will generally vest as to 25% of the shares one year after the date of grant and as to 1/48 of the shares each month thereafter.

•

Nondiscretionary, automatic grants of nonstatutory stock options will be made to outside directors. An outside director will be granted automatically, unless such director waives his right to such grant, an initial option to purchase 10,000 shares upon first becoming a member of our board of directors. The initial option vests and becomes exercisable at the time of grant. Immediately after each of our regularly scheduled annual meeting of stockholders, each outside director will be automatically granted a nonstatutory option to purchase 10,000 shares of our common stock, provided the director has served on our board for at least six months. Each annual option will be fully vested and exercisable on the date which is six months after the date of grant. The options granted to outside directors will have a per share exercise price equal to 100% of the fair market value of the underlying shares on the date of grant, and will become fully vested if we are subject to a change on control.

•

Generally, if we merge or engage in a similar type of transaction with or into another corporation, we may accelerate the vesting or exercisability of outstanding options and terminate any unexercised options unless they are assumed or substituted for by any surviving entity or a parent or subsidiary of the surviving entity.

•

The plan terminates ten years after its initial adoption, unless earlier terminated by the board. The board of directors may amend or terminate the plan at any time, subject to stockholder approval where required by applicable law. Any amendment or termination may not impair the rights of holders of outstanding awards without their consent.

401(k) Plan

We have established a tax-qualified employee savings and retirement plan for which our employees are generally eligible. Under our 401(k) Plan, employees may elect to reduce their compensation and have the amount of this reduction contributed to the 401(k) Plan. We make matching contributions. The 401(k) Plan is intended to qualify under Section 401(a) of the Internal Revenue Code so that contributions to the 401(k) Plan and income earned on plan contributions are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by us, if any, will be deductible by us when made.

Employment Agreements and Change in Control Arrangements

Employment Agreement with Takashi Kiyoizumi, M.D., Ph.D., Sc.M.

On September 26, 2000, we entered into an employment agreement with Dr. Takashi Kiyoizumi, our President and Chief Executive Officer, which was replaced by a new employment agreement on September 26, 2003. Pursuant to the agreement, Dr. Kiyoizumi is required to devote his entire business time, energy and skill to further our interests. The employment agreement has a term of three years.

The agreement provides that Dr. Kiyoizumi’s annual base salary shall be $316,663, which amount was increased by our board of directors to $323,946 for 2004. In addition, Dr. Kiyoizumi may receive incentive bonuses at the discretion of our board of directors. If Dr. Kiyoizumi’s employment is terminated by us without cause or Dr. Kiyoizumi terminates the agreement with just cause, including by reason of a change in control of MediciNova, then Dr. Kiyoizumi would be entitled to receive severance pay equal to his base salary plus the average annual bonus for either the remainder of the term of the employment agreement or 12 months, whichever period is longer. In addition, any unvested options would become immediately exercisable.

Employment Agreement with Brian Anderson

On April 26, 2004, we entered into an employment agreement with Brian Anderson, our Executive Vice President, Corporate Development. Pursuant to the agreement, Mr. Anderson is required to devote his entire

business time, attention, energies, skills, learning and best efforts to further our interests. Mr. Anderson is an “at will” employee, but both he and MediciNova are required to give 90 days’ written notice to terminate the agreement. However, in lieu of the 90 days’ notice, we may provide Mr. Anderson with an amount equal to one-fourth of his annual base salary.

The agreement provides that Mr. Anderson’s annual base salary shall be $250,000. In addition, Mr. Anderson may receive incentive bonuses at the discretion of our board of directors. The agreement also provides that if Mr. Anderson’s employment is terminated, we have the option to engage Mr. Anderson as a consultant on a quarterly basis. Compensation for each quarter of consulting services would be equal to 15% of Mr. Anderson’s annual base salary.

Employment Agreement with Richard E. Gammans, Ph.D.

On June 14, 2004, we entered into an employment agreement with Richard E. Gammans, our Executive Vice President, Clinical Research. Pursuant to the agreement, Dr. Gammans is required to devote his entire business time, attention, energies, skills, learning and best efforts to further our interests. Dr. Gammans is an “at will” employee, but both he and MediciNova are required to give three months’ written notice to terminate the agreement. However, in lieu of the three months’ notice, we may provide Dr. Gammans with an amount equal to three-fourths of his annual base salary.

The agreement provides that Dr. Gammans’ annual base salary shall be $239,000. In addition, Dr. Gammans may receive incentive bonuses at the discretion of our board of directors. The agreement also provides that if Dr. Gammans’ employment is terminated, we have the option to engage Dr. Gammans as a consultant on a quarterly basis. Compensation for each quarter of consulting services would be equal to 15% of Dr. Gammans’ annual base salary.

Employment Agreement with Kenneth W. Locke, Ph.D.

On September 26, 2000, we entered into an employment agreement with Kenneth W. Locke, our Senior Vice President, Portfolio Management. A letter dated July 30, 2003 from us to Dr. Locke set forth a new title and an increase in salary. On June 1, 2004, Dr. Locke was appointed Senior Vice President, Portfolio Management. Pursuant to the agreement, Dr. Locke is required to devote his entire business time, attention, energies, skills, learning and best efforts to further our interests. Dr. Locke is an “at will” employee, but both he and MediciNova are required to give 180 days’ written notice to terminate the agreement. However, in lieu of the 180 days’ notice, we may provide Dr. Locke with an amount equal to one-half of his annual base salary.

The July 30, 2003 letter provides that Dr. Locke’s annual base salary shall be $210,000, which amount was increased by our board of directors to $214,830 for 2004. In addition, Dr. Locke may receive incentive bonuses at the discretion of our board of directors. The agreement also provides that if Dr. Locke’s employment is terminated, we have the option to engage Dr. Locke as a consultant on a quarterly basis. Compensation for each quarter of consulting services would be equal to 15% of Dr. Locke’s annual base salary.

Employment Agreement with Mark Lotz

On February 2, 2004, we entered into an employment agreement with Mark Lotz, our Vice President, Regulatory Affairs. Pursuant to the agreement, Mr. Lotz is required to devote his entire business time, attention, energies, skills, learning and best efforts to further our interests. Mr. Lotz is an “at will” employee, but both he and MediciNova are required to give 90 days’ written notice to terminate the agreement. However, in lieu of the 90 days’ notice, we may provide Mr. Lotz with an amount equal to one-fourth of his annual base salary.

The agreement provides that Mr. Lotz’s annual base salary shall be $210,000. In addition, Mr. Lotz may receive incentive bonuses at the discretion of our board of directors. The agreement also provides that if

Mr. Lotz’s employment is terminated, we have the option to engage Mr. Lotz as a consultant on a quarterly basis. Compensation for each quarter of consulting services would be equal to 15% of Mr. Lotz’s annual base salary.

Employment Agreement with Joji Suzuki, M.D., Ph.D.

On April 26, 2004, we entered into an employment letter agreement effective as of May 10, 2004 with Joji Suzuki, our Vice President, Finance. Our board of directors approved an amendment to the agreement on September 15, 2004 to establish his current title and increased salary. Pursuant to the agreement, Dr. Suzuki is required to exercise his specialized expertise, independent judgment and discretion to provide us with high quality services. Dr. Suzuki is an “at will” employee, but we are required by Japanese law to give 30 days’ written notice to terminate the agreement. However, in lieu of the 30 days’ notice, we may provide Dr. Suzuki with an amount equal to 30 days’ pay. Dr. Suzuki is required to give us eight weeks’ notice of any intention to terminate his employment with us. If we terminate Dr. Suzuki’s employment without cause, we will provide him with six months’ severance pay, which will be cancelled upon Dr. Suzuki’s finding new employment.

The agreement, as amended, provides that Dr. Suzuki’s annual base salary shall be $200,000. In addition, Dr. Suzuki may receive incentive bonuses at the discretion of our board of directors. The agreement also provides that Dr. Suzuki will receive a benefits adjustment of $15,000, to be divided and paid monthly. In addition, as required by Japanese law, we will pay for 50% of the premium cost for Japanese workers’ compensation, unemployment and pension and welfare benefits for Dr. Suzuki.

Limitation of Liability and Indemnification Matters

Our restated certificate of incorporation limits the liability of our directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for:

•

any breach of their duty of loyalty to the corporation or its stockholders;

•

acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;

•

unlawful payments of dividends or unlawful stock repurchases or redemptions; or

•

any transaction from which the director derived an improper personal benefit.

This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission.

Our restated certificate of incorporation and bylaws provide that we will indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. Our restated certificate of incorporation and bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification.

We have entered into agreements to indemnify each of our directors and executive officers, in addition to the indemnification provided for in our restated certificate of incorporation and bylaws. In addition, we maintain directors’ and officers’ liability insurance. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.

RELATED-PARTY TRANSACTIONS

Common Stock

In September 2000, we sold 250,000 shares of our common stock at a price of $0.10 per share to Dr. Takashi Kiyoizumi, a founder, our Chief Executive Officer and a member of the board of directors, and 250,000 shares of our common stock at a price of $0.10 per share to Dr. Yuichi Iwaki, a founder, a member of our board of directors and the chairman of our board. Simultaneous with these common stock purchases, we issued warrants to each of Dr. Kiyoizumi and Dr. Iwaki to purchase shares of our common stock. The warrants originally entitled the founders to purchase an aggregate of 500,000 shares of common stock at a per share purchase price of $0.10. The warrants also contained anti-dilution provisions which resulted in an upward adjustment in the number of shares purchased under the warrants upon the issuance by us of additional shares of stock other than pursuant to our option plan. On September 2, 2004, and as a condition to the closing of our Series C preferred stock offering, the warrants were amended and restated to remove the anti-dilution protection provisions and fix the number of shares purchasable to 12,856,572, in aggregate, for both founders’ warrants.

From September 2000 to September 30, 2004, we have granted an aggregate of 930,000 options to our current directors and named executive officers, with exercise prices of $1.00 per share.

Preferred Stock

In October 2000, we sold 500,000 shares of our Series A preferred stock at a per share purchase price of $10.00 to Tanabe Seiyaku Co., Ltd. for an aggregate consideration of $5,000,000. In August 2001, we sold an additional 500,000 shares of our Series A preferred stock to Tanabe Holding America, Inc. at a per share purchase price of $10.00 for an aggregate consideration of $5,000,000. These shares of Series A preferred stock automatically will convert into 10,000,000 shares of our common stock upon completion of this offering.

From March 2003 to May 2004, we sold an aggregate of 291,150 shares of our Series B preferred stock to 18 accredited investors at a per share purchase price of $100.00 for an aggregate consideration of $29,115,000. These shares of Series B preferred stock automatically will convert into 29,115,000 shares of our common stock upon completion of this offering.

On September 2, 2004, we sold an aggregate of 27,667,856 shares of our Series C preferred stock at a per share purchase price of $1.62 to 29 accredited investors for an aggregate consideration of $44,821,927. These shares of Series C preferred stock automatically will convert into an equal number of shares of our common stock upon completion of this offering.

Essex Woodlands Health Ventures Fund VI, L.P, a holder of more than 5% of our capital stock prior to the Series C Preferred Stock financing, purchased 3,703,704 shares of Series C preferred stock. Essex beneficially owned 20.19% of our outstanding capital stock (on an as-converted to common stock basis) prior to the Series C preferred stock financing and beneficially owned 17.39% of our outstanding capital stock (on an as-converted to common stock basis) subsequent to the Series C preferred stock financing.

Other Related-Party Transactions

Our board of directors approved an arrangement in September 2001 to engage Dr. Yuichi Iwaki as a consultant to us, pursuant to which we presently pay Dr. Iwaki $20,000 per month for his services rendered. In 2003, Dr. Iwaki received $190,000 pursuant to this arrangement.

In June 2001, we entered into a Research Services Agreement with Tanabe Research Laboratories U.S.A. Inc., or TRL, one of our material stockholders. Under the agreement, TRL performed research

development services for us. The agreement was terminated in May 2003. In addition, we reimbursed TRL for certain administrative expenses beginning in 2000. During 2003, we made an aggregate of $737,199 in payments to TRL as reimbursement for administrative costs and under the Research Services Agreement for services rendered by TRL. Also, in May 2003, we sold equipment to TRL for proceeds of $194,821, the net book value of the equipment on the date of the sale.

We have entered into an agreement with holders of our preferred stock, including holders of more than 5% of such shares, whereby we granted them registration rights with respect to their shares of common stock issuable upon conversion of their preferred stock.

We have entered into indemnification agreements with each of our executive officers and directors. These indemnification agreements require us to indemnify these individuals to the fullest extent permitted by Delaware law.

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the beneficial ownership of our common stock as of September 30, 2004 by:

•

each person or entity, or group of affiliated persons, known to us to own beneficially more than 5% of our common stock;

•

each of our directors;

•

each of our named executive officers; and

•

all of our executive officers and directors as a group.

For purposes of the table below, we have assumed that 67,282,856 shares of common stock are issued and outstanding prior to the completion of this offering, which shares include preferred stock on an as-converted to common stock basis, and shares of common stock will be issued and outstanding upon completion of this offering. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options and warrants held by that person that currently are exercisable or exercisable within 60 days of September 30, 2004 are deemed outstanding. We did not deem these shares outstanding, however, for the purposes of computing the ownership percentage of any other person.


	Shares Beneficially Owned Prior to Offering			Shares Beneficially Owned After Offering
Name and Address of Beneficial Owner⁽¹⁾	Number	Percentage		Number	Percentage
Stockholders Owning More than 5% of Our Common Stock:

Tanabe Holding America, Inc.⁽²⁾	10,000,000	14.86	%

Essex Woodlands Health Ventures Fund VI, L.P.⁽³⁾	11,703,704	17.39	%

Entities affiliated with JAFCO⁽⁴⁾	7,000,000	10.40	%

Entities affiliated with Aqua RIMCO Ltd.⁽⁵⁾	5,855,556	8.70	%

Entities affiliate with Daiwa Securities Group Inc.⁽⁶⁾	3,704,136	5.51	%

Directors and Named Executive Officers:

Takashi Kiyoizumi, M.D., Ph.D.⁽⁷⁾	6,678,286	9.06	%

Yuichi Iwaki, M.D., Ph.D.⁽⁷⁾	6,678,286	9.06	%

John K.A. Prendergast, Ph.D.⁽⁸⁾	10,000	*

Daniel Vapnek, Ph.D.⁽⁹⁾	10,000	*

Brian Anderson⁽¹⁰⁾	200,000	*

Richard E. Gammans, Ph.D.⁽¹¹⁾	160,000	*

Kenneth W. Locke, Ph.D.⁽¹²⁾	300,000	*

Mark Lotz⁽¹³⁾	120,000	*

Joji Suzuki, M.D., Ph.D.⁽¹⁴⁾	130,000	*

All directors, director nominees and executive officers as a group (9 persons)⁽¹⁵⁾	14,286,572	17.62	%

*	Less than 1%

(1)	Unless otherwise noted, the address of each beneficial owner listed in the table is c/o MediciNova, Inc., 4350 La Jolla Village Drive, Suite 950, San Diego, California 92122.

(2)	The principal business address for Tanabe Holding America, Inc. is 401 Hackensack Avenue, 10^th Floor, Hackensack, New Jersey 07601.

(3)	The principal business address for Essex Woodlands Health Ventures Fund VI, L.P. is 435 Tasso Street, Suite 305, Palo Alto, California 94301.

(4)

Represents 4,200,000 shares held by JAFCO G-(9)(A) Venture Capital Investment Limited Partnership and 2,800,000 shares held by JAFCO G-(9)(B) Venture Capital Investment Limited Partnership, each such entity a subsidiary of JAFCO Co. Ltd. The principal business address for JAFCO Co. Ltd. is Tekko Building, 1-8-2 Marunouchi, Chiyoda-ku, Tokyo 100-0005, Japan.

(5)

Represents 300,000 shares held by Aqua RIMCO Biotechnology No. 1 Investment Partnership, 5,246,914 shares held by Aqua RIMCO Biotechnology No. 2 Investment Partnership and 308,642 shares held by ABP No. 2 Investment Partnership. Aqua RIMCO Ltd. is a general partner of each of these three entities. The principal business address for Aqua RIMCO Ltd. is Kawate Building, 1-5-8 Nishi Shimbashi, Minato-ku, Tokyo 105-0003, Japan.

(6)

Represents (i) 1,235,000 shares held by Daiwa Securities SMBC Principal Investments Co., Ltd. and (ii) 2,469,136 shares held by NIF Ventures Co., Ltd. and affiliates thereof (Investment Enterprise Partnership “NIF21-One(2-A),” Investment Enterprise Partnership “NIF21-One(2-B),” Venture Capital Investment Limited Partnership “NIF Japan-USA-Europe Bridge Fund” and Venture Capital Investment Limited Partnership NIF Global Fund). Daiwa Securities Group Inc. is the majority shareholder and parent of both Daiwa Securities SMBC Principal Investments Co., Ltd. and NIF Ventures Co., Ltd. NIF Ventures Co., Ltd. is a general partner of each of its above-referenced affiliates. The principal business address of Daiwa Securities SMBC Principal Investments Co., Ltd. is Marunouchi Trust Tower North, 1-8-1 Marunouchi, Chiyoda-ku, Tokyo 100-8289, Japan. The principal business address for NIF Ventures Co., Ltd. and its affiliates is 1-2-1 Kyobashi, Chuo-ku, Tokyo, 104-0035, Japan.

(7)	Represents 250,000 shares held of record and 6,428,286 shares subject to a warrant that currently is exercisable.

(8)	Represents 10,000 shares subject to an option held by John K. A. Prendergast that currently is exercisable.

(9)	Represents 10,000 shares subject to an option held by Daniel Vapnek that currently is exercisable.

(10)	Represents 200,000 shares subject to an option held by Brian Anderson that currently is exercisable.

(11)	Represents 160,000 shares subject to an option held by Richard E. Gammans that currently is exercisable.

(12)	Represents 300,000 shares subject to an option held by Kenneth W. Locke that currently is exercisable.

(13)	Represents 120,000 shares subject to an option held by Mark Lotz that currently is exercisable.

(14)	Represents 130,000 shares subject to an option held by Joji Suzuki that currently is exercisable.

(15)

Represents (i) 250,000 shares held of record by Takashi Kiyoizumi, (ii) 6,428,286 shares subject to a warrant held by Dr. Kiyoizumi that currently is exercisable, (iii) 250,000 shares held of record by Yuichi Iwaki, (iv) 6,428,286 shares subject to a warrant held by Dr. Iwaki that currently is exercisable, (v) 10,000 shares subject to an option held by John K. A. Prendergast that currently is exercisable, (vi) 10,000 shares subject to an option held by Daniel Vapnek that currently is exercisable, (vii) 200,000 shares subject to an option held by Brian Anderson that currently is exercisable, (viii) 160,000 shares subject to an option held by Richard Gammans that currently is exercisable, (ix) 300,000 shares subject to an option held by Kenneth Locke that currently is exercisable, (x) 120,000 shares subject to an option held by Mark Lotz that currently is exercisable and (xi) 130,000 shares subject to an option held by Joji Suzuki that currently is exercisable.

DESCRIPTION OF CAPITAL STOCK

The following information describes our common stock and preferred stock and provisions of our restated certificate of incorporation and our bylaws as in effect upon the closing of this offering. This description is only a summary. You should also refer to the restated certificate of incorporation and bylaws which have been filed with the SEC as exhibits to our registration statement of which this prospectus forms a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occur upon the receipt of the requisite board and stockholder approvals and upon the closing of this offering in accordance with the terms of the restated certificate of incorporation.

Upon completion of this offering, and after giving effect to the conversion of all outstanding convertible preferred stock into common stock and the amendment of our restated certificate of incorporation, our authorized capital stock will consist of 200,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $ 0.01 par value per share. As of September 30, 2004, there were 67,282,856 shares of our common stock outstanding held of record by 45 stockholders, assuming conversion of our outstanding convertible preferred stock which will occur upon the closing of this offering.

Common Stock

Subject to preferences that may be applicable to any shares of preferred stock outstanding at the time, the holders of common stock are entitled to the following:

Dividends. The holders of outstanding shares of our common stock are entitled to receive dividends out of assets legally available for the payment of dividends at the times and in the amounts as the board of directors from time to time may determine, subject to any preferential dividend rights of any holder of outstanding shares of our preferred stock.

Voting. Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders, including the election of directors. We have not provided for cumulative voting for the election of directors in our restated certificate of incorporation. This means that the holders of a majority of the shares voted can elect all of the directors then standing for election.

Preemptive rights, conversion and redemption. Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption.

Liquidation, dissolution and winding-up. Upon our liquidation, dissolution or winding-up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any preferred stock.

Each outstanding share of common stock is, and all shares of common stock to be issued in this offering when they are paid for will be, duly and validly issued, fully paid and non-assessable.

Options

As of September 30, 2004, options to purchase a total of 1,510,000 shares of common stock were outstanding, all of which are subject to lock-up provisions under the terms of the 2000 General Stock Incentive Plan under which these options were granted. Options to purchase a total of 490,000 shares of common stock remain available for grant under the 2000 General Stock Incentive Plan. Following this offering, options to purchase, or other equity-based awards with respect to, shares of our common stock will be available under our 2004 Stock Incentive Plan and we will cease issuing options under our 2000 General Stock Incentive Plan.

Preferred Stock

Upon the closing of this offering, all outstanding shares of our preferred stock will convert into an aggregate of 66,782,856 shares of common stock.

Following the offering, our board of directors will be authorized, subject to the limits imposed by the Delaware General Corporation Law, to issue 5,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations and restrictions. Our board of directors can also increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders.

Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that adversely affect the voting power or other rights of our common stockholders. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions, financings and other corporate purposes, could have the effect of delaying, deferring or preventing a change in control and may cause the market price of our common stock to decline or impair the voting and other rights of the holders of our common stock. We have no current plans to issue shares of preferred stock.

Warrants

As of September 30, 2004, there were warrants outstanding to purchase 13,356,572 shares of our common stock at a weighted average exercise price of $0.13 per share. Generally, each warrant contains provisions for the adjustment of its exercise price and the number of shares issuable upon its exercise upon the occurrence of any stock dividend or stock split. In addition, 12,856,572 of the shares of our common stock issuable upon the exercise of the warrants provide their holders with rights to have those shares registered with the SEC, as discussed more fully below. These warrants have net exercise provisions under which the holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of our common stock at the time of exercise of the warrants after deduction of the aggregate exercise price.

Registration Rights

Under an amended and restated registration rights agreement, following this offering, the holders of 80,639,428 shares of common stock have the right to require us to register their shares with the SEC so that those shares may be publicly resold or to include their shares in any registration statement we file with the SEC.

Demand Rights

At any time after the earlier of December 31, 2005 or the date which is six months after our securities are traded on a U.S. exchange or listed on a U.S. automatic quotation system, if the holders of more than 25% of the outstanding shares of common stock issued or issuable upon conversion of our existing Series B preferred stock or Series C preferred stock, request that we file a registration statement with the SEC having an aggregate offering price to the public of not less than $5,000,000, we will use our best efforts to cause such shares to be registered and to include in such registration, if requested, the 500,000 shares of common stock issued to our founders, the 12,856,572 shares of common stock issuable by reason of the exercise of warrants held by our founders and 10,000,000 shares of common stock issued upon conversion of our existing Series A preferred stock.

If we are eligible to file a registration statement on Form S-3, holders of shares having registration rights have the right to demand that we file a registration statement on Form S-3 so long as the aggregate amount of securities to be sold under the registration statement on Form S-3 exceeds two million dollars.

Piggy Back Registration Rights

At any time after the date which is six months after our securities are traded on a U.S. exchange or listed on a U.S. automatic quotation system, the holders of shares having registration rights will be entitled to unlimited “piggy-back” registration rights on all registrations of MediciNova. We and the underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, but not below 25% of the total number of shares included in the registration statement, except for this initial public offering in which the underwriters have excluded any sales by existing investors.

Expenses of Registration

We shall bear all registration expenses, exclusive of underwriting discounts and commissions, of all demand and piggy-back registrations.

Expiration of Registration Rights

The registration rights will terminate for each stockholder if and when that stockholder holds less than 1% of our outstanding stock, our shares trade on a U.S. exchange or are listed on a U.S. automated system and all of such holder’s registrable shares are tradable under Rule 144 of the Securities Act during any 90 day period.

Delaware Anti-Takeover Law

We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or Delaware law, regulating corporate takeovers. In general, these provisions prohibit a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:

•

the transaction is approved by the board of directors before the date the interested stockholder attained that status;

•

upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or

•

on or after the date the business combination is approved by the board of directors and authorized at a meeting of stockholders, by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.

Section 203 defines “business combination” to include the following:

•

any merger or consolidation involving the corporation and the interested stockholder;

•

any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;

•

subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

•

any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or

•

the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons.

A Delaware corporation may opt out of this provision either with an express provision in its original certificate of incorporation or in an amendment to its certificate of incorporation or bylaws approved by its stockholders. However, we have not opted out of this provision. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock will be .

Listing

We intend to apply to have our common stock included for quotation on the Mothers Market of the Tokyo Stock Exchange.

Clearing and Transferability of Shares

The share certificates representing the offered shares will be deposited by us with The Depository Trust Company of New York. The Depository Trust Company’s nominee, Cede & Co., will be the registered owner of such shares. At the closing, The Depository Trust Company will electronically deposit the shares in the account of Japan Securities Settlement & Custody, Inc., or JSSC. Thereafter, the JSSC will electronically transfer, in book entry form, beneficial ownership of the shares to the purchasers of the shares through their brokers and other financial institutions that are JSSC participants. The JSSC will not hold any certificates for common stock. Certificates representing shares of common stock held through the JSSC will not be issued unless such shares are withdrawn from the JSSC, in which case the shares will not be eligible to trade on a Japanese exchange unless such shares are re-deposited with The Depository Trust Company for credit to the JSSC’s account with The Depository Trust Company.

Shares transferred from The Depository Trust Company to the account of the JSSC may be freely transferred among market participants through the JSSC clearing system. The shares to be offered and listed for trading on the Tokyo Stock Exchange’s Mothers Market are registered shares. Accordingly, stockholders holding share certificates who desire to transfer their shares outside The Depository Trust Company/JSSC clearing system may effect the transfer by effecting withdrawal of their shares from the JSSC and submitting to our transfer agent their share certificates, and the transfer agent will issue a new certificate in the name of the transferee. If stockholders holding share certificates wish to transfer their registered shares to The Depository Trust Company for inclusion in the JSSC clearing system, the stockholders must submit their share certificates to our transfer agent, and the transfer agent will register the shares in the name of Cede & Co. These shares will be credited to the account of the JSSC at The Depository Trust Company. Upon registration of the shares with The Depository Trust Company for the benefit of the JSSC and fulfillment of any other requirements of The Depository Trust Company or the JSSC, beneficial ownership of the shares may be transferred through the JSSC.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock. We cannot predict the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public market after the restrictions lapse, or the perception that such sales may occur, could cause the prevailing market price to decrease or to be lower than it might be in the absence of those sales or perceptions.

Sale of Restricted Shares

When this offering is completed, we will have a total of shares of common stock outstanding, assuming no exercise of outstanding options prior to completion of this offering. The shares offered by this prospectus will be freely tradable, unless they are purchased by our affiliates as defined in Rule 144(a) under the Securities Act. The remaining shares are restricted, which means they were originally sold in offerings that were not subject to a registration statement filed with the U.S. Securities and Exchange Commission. These restricted shares may be resold only through registration under the Securities Act or under an available exemption from such registration, such as provided through Rule 144, Rule 144(k) or Rule 701.

Lock-Up Agreements

All of our officers and directors and all of our stockholders are subject to lock-up provisions under which they have agreed not to transfer or dispose of, directly or indirectly, any shares of common stock, or any securities convertible into or exercisable or exchangeable for shares of common stock, for a period of 180 days after the listing of our shares on the Mothers Market of the Tokyo Stock Exchange.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the date of the prospectus, a person who has beneficially owned shares of our common stock for at least one year, including the holding period of certain prior owners other than our affiliates, is entitled to sell within any three-month period a number of shares of our common stock that does not exceed 1% of the number of shares of our common stock then outstanding, which will equal approximately shares immediately after this offering.

Sales under Rule 144, however, are subject to certain manner of sale provisions, notice requirements and the availability of current public information about our company. As of the date of this prospectus, approximately million of the restricted shares will be eligible for sale under Rule 144 beginning 90 days after the date of this prospectus, and the remaining restricted shares will become eligible for sale at various times thereafter.

Rule 144(k)

Under Rule 144(k), in general, a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale and who has beneficially owned shares for at least two years, including the holding period of certain prior owners other than affiliates, is entitled to sell those shares without complying with the manner of sale provisions, notice requirements, public information requirements or volume limitations of Rule 144. Affiliates of our company, however, must always sell pursuant to Rule 144, even after the otherwise applicable Rule 144(k) holding period has been satisfied.

Rule 904

Rule 904 of Regulation S of the U.S. Securities Act generally provides that shares owned by any person, other than persons deemed to be an affiliate of ours, may be sold without registration outside the United States, provided the sale is accomplished in an offshore transaction, as that term is defined in Regulation S, and no directed selling efforts, as that term is defined in Regulation S, are made, subject to other conditions. In general,

this means that the shares, including restricted shares and shares of our common stock held by our directors and officers who are our affiliates solely by virtue of holding that position, may be sold without registration on the Tokyo Stock Exchange—Mothers Market or otherwise outside the United States. However, our officers and directors and all of our stockholders have agreed, pursuant to the lock-up agreements noted above, not to sell their shares of our common stock solely in reliance upon Rule 904 for a period of one year following the listing of our shares of common stock on the Mothers Market.

Rule 701

In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases securities, including options, from us before the date of this prospectus through our 2000 General Stock Incentive Plan or through some other compensatory stock or option plan or other written agreement is eligible to resell those shares, including shares issued upon the exercise of options, 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, public information and volume restrictions, contained in Rule 144. As of September 30, 2004, none of our outstanding shares of common stock had been issued in reliance on Rule 701 as a result of the exercise of stock options. All of these shares are subject to contractual 180-day lock-up restrictions, and all of these shares will be eligible for sale upon expiration of such lock-up restrictions. In addition, as of September 30, 2004, options to purchase a total of 1,510,000 shares of common stock were outstanding.

Stock Options

We intend to file, and the underwriters have agreed to allow us to file, a registration statement on Form S-8 under the Securities Act covering shares of common stock reserved for issuance under our stock incentive plans. Accordingly, shares registered under this registration statement will be available for sale in the open market upon exercise by the holders, unless those shares are subject to vesting restrictions with us or the contractual restrictions described above.

Registration Rights

For a description of registration rights, please see the section entitled “Registration Rights” on page 64.

The Japanese Equity Markets

Japanese Securities Laws

As a U.S. company offering securities on a Japanese stock exchange, we are subject to various laws and regulations in both jurisdictions. Some of these laws and regulations, in turn, can affect the ability of holders of our securities to transfer or sell our securities.

At present, Japan does not restrict the export or import of capital, except for transactions with related parties of the former regime of Iraq and other parties designated by the Ministry of Finance of Japan, some of which are designated in accordance with applicable resolutions adopted by the United Nations and the European Union.

There are no limitations on the right of non-resident owners to hold or vote their shares imposed by Japanese law or our restated certificate of incorporation or bylaws.

The Tokyo Stock Exchange and the Mothers Market

The Tokyo Stock Exchange is the most significant of the five Japanese stock exchanges and accounted for approximately 89% of the turnover in traded shares in Japan in 2003. The aggregate annual turnover of the Tokyo Stock Exchange in 2003 of approximately ¥242,371 billion, based on the Tokyo Stock Exchange’s practice of separately recording the sale and purchase components involved in any trade, for both equity and debt instruments, made it the third largest stock exchange in the world behind the New York Stock Exchange and the London Stock Exchange in terms of turnover.

The Mothers Market segment of the Tokyo Stock Exchange is a new trading segment that was launched in November 1999. It is designed for innovative, small to mid-size companies in high growth industries or in traditional industries that have an international orientation and that are willing to provide active investor relations. Issuers are required to provide investors on an ongoing basis with information such as annual, semi-annual and quarterly reports, including cash flow statements, and a corporate action timetable. This information is required to be submitted in Japanese in electronic form, thus enabling the stock exchange to disseminate corporate information via the Internet.

The Mothers Market differs from the other sections of the Tokyo Stock Exchange in the following ways:

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A history of financial results and a minimum number of years since incorporation are not required as listing criteria. A company that has adequate operational plans is acceptable.

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Examination of listings emphasizes disclosure of a company’s main business and risk factors.

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The quarterly disclosed financial documents of the companies listed on the Mothers Market must be accompanied by the auditor’s review report.

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There are delisting criteria such as (i) the sales recorded for the last business year, other than the business year in which the company first lists on the Mothers Market, are less than ¥100 million, approximately $900,000 at recent exchange rates (not applicable if profits are recorded for that year) and (ii) the market capitalization is less than ¥500 million, subject to a grace period, neither of which requirements exists for other sections of the Tokyo Stock Exchange.

The initial public offering price and the initial settlement will all be denominated in U.S. dollars. Upon the listing date, the Tokyo Stock Exchange will determine a reference price in Japanese yen by converting the initial public offering price using the previous day’s exchange rate at the close of business in New York. All subsequent trading of the shares on the Mothers Market will be conducted in Japanese yen.

Trading of the shares listed on the Tokyo Stock Exchange, including the Mothers Market, takes place through an electronic trading system. Trading takes place every business day from 9:00 a.m. to 11:00 a.m. and from 12:30 p.m. to 3:00 p.m., Tokyo time. Trading on the Tokyo Stock Exchange is done through registered securities firms who are members of the Tokyo Stock Exchange.

Transactions of the Tokyo Stock Exchange are normally settled on the third business day following trading. Trading can be suspended by the Tokyo Stock Exchange if orderly stock exchange trading is temporarily endangered or if a suspension is in the public interest.

We are applying to list our shares on the Mothers Market. The Mothers Market is still a relatively new market. Accordingly, there can be no assurance that an active trading market for the shares will develop on the Mothers Market or that the Mothers Market will not experience problems in settlement or clearance as trading develops. Any such delays or problems could adversely affect the market price of the shares. Persons proposing to trade the shares on the Mothers Market should inform themselves about the potential costs of such trading.

Trading Units on the Tokyo Stock Exchange

Trading on the Tokyo Stock Exchange is in specific trading units consisting of one or more shares. The number of shares per trading unit is determined by the regulations of the Tokyo Stock Exchange. We expect that our shares will initially trade in units of shares.

Report of Substantial Shareholdings

The Securities and Exchange Law of Japan requires any person who has become a holder of more than 5% of the total issued shares of a company listed on any Japanese stock exchange or whose shares are traded on the over-the-counter market to file with the relevant Local Finance Bureau, within five business days, a report

concerning those shareholdings. A similar report must also be filed to reflect any change of 1% or more in the above shareholding. Copies of any reports must also be furnished to the company and to all Japanese stock exchanges on which the company’s shares are listed or, in the case of shares traded on the over-the-counter market, the Securities Dealers Association of Japan. For this purpose, shares issuable to a 5% or greater stockholder upon exercise of subscription warrants are taken into account in determining both the number of shares held by that stockholder and the company’s total issued share capital.

Daily Price Fluctuation Limits under Japanese Stock Exchange Rules

Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price fluctuation limits for each stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell the shares at such price on a particular trading day, or at all.

TAX MATTERS

Japanese Tax Matters

The following is a summary of certain tax matters arising under Japanese tax law in force on the date of this prospectus. The summary does not purport to be a comprehensive description of all of the tax considerations which may be relevant as to the decision to acquire shares of our common stock. The summary is based on the tax laws of Japan in effect on the date of this prospectus, which may be subject to change. The summary does not address aspects of Japanese taxation other than taxation of dividends, capital gains taxation and gift and inheritance taxation, and does not address all aspects of such Japanese taxation. The summary does not consider any specific facts or circumstances that may apply to a particular purchaser or a particular transaction. Prospective investors should consult their professional advisors as to the tax consequences of any acquisition, holding or disposal of shares of our common stock, including, in particular, the effect of tax laws of any other jurisdiction.

Income Taxation of Dividends

Any dividends distributed to Japanese residents or Japanese companies are, in principle, fully subject to Japanese income or corporate tax. The same is true for non-residents of Japan and non-Japanese companies who have permanent establishments and the dividends are attributable to such permanent establishments in Japan. With respect to dividends paid in Japan through, for example, a paying agent in Japan, the balance of such dividends remaining (after collection of the withholding tax, if any, of the United States or any local public entity thereof from the payment of such dividends in the United States) will be subject to income tax at the withholding tax rate set out in the following table, to be withheld at the source in certain circumstances.

Withholding Tax Rate on Dividends


Period in which the Dividends are to be Paid	Withholding Tax Rate		Remarks
January 1, 2004—March 31, 2008	10	%	7% income tax, 3% residents’ tax
April 1, 2008—	20	%	15% income tax, 5% residents’ tax

Dividend withholding tax levied in the United States can be credited against the Japanese income tax liability of the Japanese residents and Japanese companies. Alternatively, a Japanese resident or Japanese company may deduct the total amount of U.S. withholding tax from his, her or its Japanese taxable income.

If the Convention between the Government of Japan and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income applies, a Japanese corporation that has beneficial title to at least 50% of the shares of a U.S. corporation is exempt from U.S. taxation with respect to the dividends paid by the U.S. corporation. A Japanese corporation that has beneficial title to at least 10% of the shares of a U.S. corporation is entitled to a reduction or refund of U.S. taxes in excess of 5%, and all other Japanese residents or corporations are entitled to a refund or reduction of U.S. taxes in excess of 10%. If the shares are held by Japanese holders through a partnership, the dividends, including the withholding tax credit, are allocated to the partners according to their interest in the partnership.

Any dividends distributed to stockholders who are non-residents of Japan or non-Japanese companies and who do not have permanent establishments in Japan are not subject to Japanese income or corporate tax.

Capital Gains Tax

In principal, capital gains by Japanese residents arising from transactions in our common stock will be subject to income tax and capital losses arising from transactions in our common stock will be deductible from other capital gains arising from transactions in our common stock. Taxpayers will pay tax equal to 20% of the

total net profits realized on all stock transactions during the taxable year. The tax rate for transfers of our common stock conducted by those satisfying both of the following conditions shall be 10% for transfers conducted before December 31, 2007:

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residents of Japan or non-residents having permanent establishments in Japan; and

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those who conduct the transfer through a securities company or a bank, or otherwise stipulated by applicable tax laws and regulations.

For our common stock held by Japanese corporations, all capital gains and losses arising from transactions in our common stock are included in the determination of taxable income.

Stockholders who are non-residents of Japan or non-Japanese companies and who do not have permanent establishments in Japan are not subject to capital gains tax.

Gift and Inheritance Taxes

Transferees of our common stock are subject to Japanese inheritance and gift tax upon transfer by reason of death or as a gift, based on the market value at the time of the death or gift if the heir or donee, as applicable, is a tax resident of Japan at the time of the death or gift, as applicable, or, if of Japanese nationality, has been a resident of Japan within the five-year period prior to the death or gift, as applicable.

Other Japanese Taxes

There are no Japanese transfer, stamp or other similar taxes which would apply to the sale or transfer of shares of our common stock.

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK

The following discussion summarizes certain U.S. federal income and estate tax consequences of the purchase, ownership and disposition of our common stock by a non-U.S. holder, as we define that term below. This discussion is based upon the U.S. Internal Revenue Code of 1986, as amended, or the Code, existing U.S. Treasury Department regulations and judicial decisions and administrative interpretations thereof, all as of the date hereof. These authorities are subject to change, possibly with retroactive effect, and any change could affect the continuing validity of this discussion. We cannot assure you that the U.S. Internal Revenue Service, or IRS, will not challenge one or more of the tax consequences described herein. We have not sought, nor do we intend to seek, a ruling from the IRS or an opinion of counsel with respect to the U.S. federal income and estate tax consequences of purchasing, owning or disposing of our common stock.

In this discussion, we do not purport to address all tax considerations that may be important to a particular non-U.S. holder in light of the holder’s circumstances, or to certain categories of investors (including, without limitation, partnerships or other pass-through entities and their owners, banks, insurance companies, tax-exempt organizations, dealers in securities, holders of securities held as part of a straddle, hedge, conversion transaction or other risk-reduction transaction, U.S. expatriates or persons who hold or receive common stock as compensation) that may be subject to special rules. This discussion applies only to non-U.S. holders that hold our common stock as a capital asset within the meaning of Section 1221 of the Code. This discussion also does not address the tax considerations arising under the laws of any foreign, state, local or other jurisdiction or, unless otherwise specified, under any applicable tax treaties.

YOU SHOULD CONSULT YOUR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, INCLUDING THE EFFECT AND APPLICABILITY OF THE TAX LAWS OF OTHER JURISDICTIONS OR TAX TREATIES.

A “non-U.S. holder” is a beneficial owner of our common stock that is not:

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an individual who is a citizen or resident of the United States for U.S. federal income tax purposes;

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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any State thereof or the District of Columbia;

•

an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

•

a trust if (i) the administration of the trust is subject to the primary supervision of a court in the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (ii) the trust has a valid election in effect under applicable U.S. Treasury Department regulations to be treated as a U.S. person.

If a partnership holds our common stock, the tax treatment of a partner generally will depend on the status of the partner and upon the activities of the partnership. If you are a partner of a partnership holding our common stock, we suggest that you consult your tax advisors.

U.S. Trade or Business Income

For purposes of the following discussion, dividends and gains on the sale, exchange or other disposition of our common stock will be considered to be “U.S. trade or business income” if such income or gain is (i) effectively connected with the conduct of a U.S. trade or business or (ii) in the case of a treaty resident, attributable to a permanent establishment in the United States. Generally, U.S. trade or business income is subject to U.S. federal income tax on a net income basis at regular graduated tax rates. Any U.S. trade or business income received by a non-U.S. holder that is a corporation may, under specific circumstances, be subject to an additional “branch profits tax” at a 30% rate or a lower rate that an applicable income tax treaty may specify.

Dividends

Dividends paid to a non-U.S. holder of common stock generally will be subject to withholding of U.S. federal income tax at a 30% rate unless the dividends are U.S. trade or business income and the non-U.S. holder files a properly executed IRS Form W-8ECI with the withholding agent.

The 30% withholding rate may be reduced if the non-U.S. holder is eligible for the benefits of an income tax treaty that provides for a lower rate. Generally, to claim the benefits of an income tax treaty, a non-U.S. holder of common stock will be required to provide a properly executed IRS Form W-8BEN and satisfy applicable certification and other requirements, including, in certain cases, obtaining from and furnishing to the IRS a taxpayer identifying number. Non-U.S. holders will not be required to furnish a U.S. taxpayer identifying number in order to claim treaty benefits with respect to dividends on our common stock if our common stock is traded on an established financial market. A non-U.S. holder of common stock that is eligible for a reduced rate of U.S. withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS. A non-U.S. holder should consult its tax advisor as to its entitlement to benefits under a relevant income tax treaty.

Disposition of Common Stock

A non-U.S. holder generally will not be subject to U.S. federal income tax in respect of gain recognized on a sale or exchange of common stock unless:

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the gain is U.S. trade or business income;

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the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the sale or exchange and meets other requirements; or

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we are or have been a “United States real property holding corporation,” or USRPHC, for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition and the period that the non-U.S. holder held our common stock.

The tax relating to stock in a USRPHC does not apply to a non-U.S. holder whose holdings, direct and indirect, at all times during the applicable period, amount to 5% or less of the common stock, provided that the common stock is regularly traded on an established securities market. Generally, a corporation is a USRPHC if the fair market value of its “United States real property interests” equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. We believe that we have not been and are not currently a USRPHC for U.S. federal income tax purposes, nor do we anticipate becoming a USRPHC in the future. However, no assurance can be given that we will not be a USRPHC when a non-U.S. holder sells its shares of common stock.

Federal Estate Taxes

An individual non-U.S. holder who is treated as the owner of, or has made certain lifetime transfers of, an interest in our common stock will be required to include the value thereof in his or her gross estate for U.S. federal estates tax purposes, and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise.

Information Reporting Requirements and Backup Withholding Tax

Dividends

We must report annually to the IRS and to each non-U.S. holder the amount of dividends, if any, paid to such non-U.S. holder and tax withheld with respect to those dividends. These information reporting requirements apply even if withholding was not required because the dividends were effectively connected dividends or withholding was reduced or eliminated by an applicable tax treaty. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which a non-U.S. holder resides. Dividends paid to non-U.S. holders of common stock generally will be exempt from backup withholding if you certify as to your non-U.S. holder status under penalties of perjury or you otherwise qualify for an exemption (provided that neither we nor our agent know or have reason to know that you are a U.S. person or that the conditions of any other exemptions are not in fact satisfied.

Disposition of Common Stock

The payment of the proceeds from the disposition of common stock to or through the U.S. office of a U.S. or foreign broker will be subject to information reporting and possible backup withholding unless you provide the certification described above or you otherwise qualify for an exemption. The proceeds of a disposition of common stock effected outside the United States by a non-U.S. holder to or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, if such broker is a U.S. person, a controlled foreign corporation, a foreign person for whom 50 percent or more of its gross income from all sources for certain periods is effectively connected with a trade or business in the United States, or a foreign partnership that is engaged in the conduct of a trade or business in the United States or that has one or more partners that are U.S. persons who in the aggregate hold more than 50 percent of the income or capital interests in the partnership, information reporting requirements will apply unless such broker has documentary evidence in its files of the holder’s non-U.S. status and has no actual knowledge or reason to know to the contrary or unless the holder otherwise qualifies for an exemption.

Backup withholding is currently applied at a rate of 28% but is not an additional tax. Any amount withheld under the backup withholding rules is allowable as a credit against your U.S. federal income tax liability, if any, provided that the required information or appropriate claim for refund is submitted properly to the IRS.

UNDERWRITING

We have entered into an underwriting agreement with Daiwa Securities SMBC Co. Ltd. and the other Japanese underwriters listed below with respect to the shares being offered. Each underwriter has severally agreed to purchase the number of shares indicated in the following table at the initial public offering price less the underwriting discount. Daiwa Securities SMBC Co. Ltd. is the lead underwriter for the offering.


Underwriters		Number of Shares
Daiwa Securities SMBC Co. Ltd.




Total

The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.

If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional shares from us to cover such sales. They may exercise the over-allotment option for days after the day on which the shares are first quoted on the Mothers Market. If any shares are purchased pursuant to the over-allotment option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by us assuming an offer price of $ . Such amounts are shown assuming both no exercise and full exercise of the over-allotment option.

We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $ .

Our common stock will be quoted on the Mothers Market of the Tokyo Stock Exchange under the symbol “ ”.

Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. If all the shares are not sold at the initial offering price, the underwriters may change the offering price and the other selling terms.

Prior to the offering, there has been no public market for the shares. The initial public offering price will be negotiated among us and the underwriters. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be our historical performance, stage of development of our product candidates, estimates of our business potential and earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses.

We, our directors, officers, stockholders, option holders and warrantholders have agreed with the underwriters not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock for 180 days from the date of this prospectus, except with the prior written consent of Daiwa Securities SMBC Co. Ltd. acting on behalf of the underwriters.

In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. “Naked” short sales are sales in excess of this option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. To facilitate the ability of the underwriters to settle transactions involving over-allotments prior during the 30-day period during which the underwriters have an over-allotment option to purchase shares of common stock from us, has entered into a stock lending arrangement covering of our shares. The underwriters are obligated to return all borrowed shares to concurrent with the exercise of the over-allotment option. No fees or other remuneration will be paid by the underwriters to for the loan of these shares of common stock.

These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Mothers Market, in the over-the-counter market or otherwise.

We intend to apply for the listing of all of our outstanding shares of common stock as well as shares of common stock reserved for issuance upon the exercise of options and shares of common stock reserved for issuance upon the exercise of warrants as of for trading on the Mothers Market of the Tokyo Stock Exchange.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the U.S. Securities Act of 1933.

The underwriters expect to deliver the shares against payment in dollars through the facilities of the Japan Securities Settlement & Custody, Inc. on or about , 2005.

Investment companies controlled by Daiwa Securities Group Inc., the majority shareholder of Daiwa Securities SMBC Co. Ltd., own Series C Preferred Stock convertible into 5.51% of our outstanding shares immediately prior to the offering. These entities acquired their shares together with other investors on September 2, 2004.

LEGAL MATTERS

Selected legal matters with respect to the validity of the common stock offered by this prospectus are being passed upon for us by Pillsbury Winthrop LLP, San Diego, California. Selected legal matters in connection with this offering will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP, Tokyo, Japan. A member of Pillsbury Winthrop LLP serves as our Secretary and holds an option to purchase 100,000 shares of our common stock at a per share purchase price of $1.00.

EXPERTS

The financial statements of MediciNova, Inc. at December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement under the Securities Act with respect to the common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Please refer to the registration statement, exhibits and schedules for further information with respect to the common stock offered by this prospectus. Statements contained in this prospectus regarding the contents of any contract or other document are not necessarily complete. With respect to any contract or document filed as an exhibit to the registration statement, you should refer to the exhibit for a copy of the contract or document, and each statement in this prospectus regarding that contract or document is qualified by reference to the exhibit. A copy of the registration statement and its exhibits and schedules may be inspected without charge at the SEC’s public reference room, located at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings, including this registration statement, are also available to the public on the SEC’s website at www.sec.gov.

Upon completion of this offering, we will be subject to the information and reporting requirements of the Securities Exchange Act and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available for inspection at the public reference room and website of the SEC referred to above. We maintain a website at www.medicinova.com. You may access our periodic reports and any amendments to those reports filed with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The reference to our website does not constitute incorporation by reference of the information contained therein.

MediciNova, Inc.

(a development stage company)

INDEX TO FINANCIAL STATEMENTS


Report of Ernst & Young LLP, Independent Registered Public Accounting Firm		F-2
Financial Statements
Balance Sheets		F-3
Statements of Operations		F-4
Statements of Stockholders’ Equity		F-5
Statements of Cash Flows		F-6
Notes to Financial Statements		F-7

F-1

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

MediciNova, Inc.

We have audited the accompanying balance sheets of MediciNova, Inc. (a development stage company) as of December 31, 2002 and 2003, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003, and the statement of stockholders’ equity for the period from September 26, 2000 (inception) to December 31, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MediciNova, Inc. (a development stage company) at December 31, 2002 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, and the statement of stockholders’ equity for the period from September 26, 2000 (inception) to December 31, 2000, in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

San Diego, California

September 10, 2004

F-2

MediciNova, Inc.

(a development stage company)

Balance Sheets


	December 31,						June 30, 2004			Pro Forma Stockholders’ Equity at June 30, 2004
	2002			2003			June 30, 2004			Pro Forma Stockholders’ Equity at June 30, 2004
							(unaudited)			(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,281,118		$	4,240,699		$	13,941,264
Marketable securities available-for-sale		—			1,250,000			1,250,000
Prepaid expenses and other current assets		58,966			108,360			272,293

Total current assets		1,340,084			5,599,059			15,463,557
Property and equipment, net		246,406			32,250			168,124

	$	1,586,490		$	5,631,309		$	15,631,681

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	108,657		$	329,328		$	699,629
Accrued expenses		70,759			294,500			307,829
Due to affiliate		265,466			—			—
Accrued compensation and related expenses		19,143			137,599			164,901

Total current liabilities		464,025			761,427			1,172,359
Advances received for the sale of convertible preferred stock		—			300,000			—
Commitments
Stockholders’ equity:
Convertible preferred stock, $0.01 par value; 3,000,000, 3,000,000 and 5,000,000 shares authorized at December 31, 2002 and 2003 and June 30, 2004 (unaudited), respectively; 1,000,000, 1,107,500 and 1,291,150 shares issued and outstanding at December 31, 2002 and 2003 and June 30, 2004 (unaudited), respectively; no shares outstanding pro forma (unaudited)		10,000			11,075			12,912		$	—
Common stock, $0.001 par value; 16,000,000, 80,000,000 and 80,000,000 shares authorized at December 31, 2002 and 2003 and June 30, 2004 (unaudited), respectively; 500,000 shares issued and outstanding at December 31, 2002 and 2003 and June 30, 2004 (unaudited), respectively; 39,615,000 shares outstanding pro forma (unaudited)		500			500			500			39,615
Additional paid-in capital		10,039,500			19,694,972			57,406,689			57,380,486
Deferred employee stock-based compensation		—			—			(1,127,510	)		(1,127,510	)
Deficit accumulated during the development stage		(8,927,535	)		(15,136,665	)		(41,833,269	)		(41,833,269	)

Total stockholders’ equity		1,122,465			4,569,882			14,459,322		$	14,459,322

Total liabilities and stockholders’ equity	$	1,586,490		$	5,631,309		$	15,631,681

See accompanying notes.

F-3

MediciNova, Inc.

(a development stage company)

Statements of Operations


	Years ended December 31,									Six months ended June 30,						Period from September 26, 2000 (inception) to June 30, 2004
	2001			2002			2003			2003			2004
										(unaudited)			(unaudited)			(unaudited)
Revenues	$	—		$	—		$	—		$	—		$	186,960		$	186,960
Cost of revenues		—			—			—			—			165,760			165,760

Gross profit		—			—			—			—			21,200			21,200
Operating expenses:
Research and development		951,408			5,551,310			4,723,158			2,228,610			6,108,352			17,606,160
General and administrative		1,063,440			1,461,526			1,537,945			707,011			1,223,364			5,286,275
Amortization of employee stock-based compensation:
Research and development		—			—			—			—			13,782			13,782
General and administrative		—			—			—			—			10,208			10,208
Stock-based compensation related to founders’ warrants		—			—			—			—			19,405,950			19,405,950

Total operating expenses		2,014,848			7,012,836			6,261,103			2,935,621			26,761,656			42,322,375

Operating loss		(2,014,848	)		(7,012,836	)		(6,261,103	)		(2,935,621	)		(26,740,456	)		(42,301,175	)
Other income, net		220,114			81,360			51,973			23,235			43,852			467,906

Net loss	$	(1,794,734	)	$	(6,931,476	)	$	(6,209,130	)	$	(2,912,386	)	$	(26,696,604	)	$	(41,833,269	)

Basic and diluted net loss per share	$	(3.59	)	$	(13.86	)	$	(12.42	)	$	(5.82	)	$	(53.39	)

Shares used to compute basic and diluted net loss per share		500,000			500,000			500,000			500,000			500,000

Pro forma net loss per common share assuming conversion of preferred stock, basic and diluted							$	(0.37	)				$	(0.96	)

Shares used in computing pro forma net loss per common share assuming conversion of preferred stock, basic and diluted								16,778,767						27,946,401

See accompanying notes.

F-4

MediciNova, Inc.

(a development stage company)

Statements of Stockholders’ Equity


	Convertible preferred stock			Common stock			Additional paid-in capital		Deferred compensation			Deficit accumulated during the development stage			Total stockholders’ equity
	Shares	Amount		Shares	Amount		Additional paid-in capital		Deferred compensation			Deficit accumulated during the development stage			Total stockholders’ equity
Issuance of common stock for cash to founders at $0.10 per share in September	—	$	—	500,000	$	500	$	49,500	$	—		$	—		$	50,000
Issuance of Series A convertible preferred stock at $10 per share in October	500,000		5,000	—		—		4,995,000		—			—			5,000,000
Net loss and comprehensive loss	—		—	—		—		—		—			(201,325	)		(201,325	)

Balance at December 31, 2000	500,000		5,000	500,000		500		5,044,500		—			(201,325	)		4,848,675
Issuance of Series A convertible preferred stock at $10 per share in August	500,000		5,000	—		—		4,995,000		—			—			5,000,000
Net loss and comprehensive loss	—		—	—		—		—		—			(1,794,734	)		(1,794,734	)

Balance at December 31, 2001	1,000,000		10,000	500,000		500		10,039,500		—			(1,996,059	)		8,053,941
Net loss and comprehensive loss	—		—	—		—		—		—			(6,931,476	)		(6,931,476	)

Balance at December 31, 2002	1,000,000		10,000	500,000		500		10,039,500		—			(8,927,535	)		1,122,465
Issuance of Series B convertible preferred stock at $100 per share, net of issuance costs of $1,093,453, in March, April, May and December	107,500		1,075	—		—		9,655,472		—			—			9,656,547
Net loss and comprehensive loss	—		—	—		—		—		—			(6,209,130	)		(6,209,130	)

Balance at December 31, 2003	1,107,500		11,075	500,000		500		19,694,972		—			(15,136,665	)		4,569,882
Issuance of Series B convertible preferred stock at $100 per share, net of issuance costs of $1,208,896, in January, February, March, April and May (unaudited)	183,650		1,837					17,154,267		—			—			17,156,104
Stock-based compensation related to founders’ warrants (unaudited)	—		—	—		—		19,405,950		—			—			19,405,950
Deferred employee stock-based compensation (unaudited)	—		—	—		—		1,151,500		(1,151,500	)		—			—
Amortization of deferred employee stock-based compensation (unaudited)	—		—	—		—		—		23,990			—			23,990
Net loss and comprehensive loss (unaudited)	—		—	—		—		—		—			(26,696,604	)		(26,696,604	)

Balance at June 30, 2004 (unaudited)	1,291,150	$	12,912	500,000	$	500	$	57,406,689	$	(1,127,510	)	$	(41,833,269	)	$	14,459,322

See accompanying notes.

F-5

MediciNova, Inc.

(a development stage company)

Statements of Cash Flows


	Years ended December 31,									Six months ended June 30,						Period from September 26, 2000 (inception) to June 30, 2004
	2001			2002			2003			2003			2004
Operating activities
Net loss	$	(1,794,734	)	$	(6,931,476	)	$	(6,209,130	)	$	(2,912,386	)	$	(26,696,604	)	$	(41,833,269	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash stock-based compensation		—			—			—			—			19,429,940			19,429,940
Depreciation and amortization		21,977			68,072			29,872			25,343			14,111			134,032
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		17,963			(30,648	)		(49,394	)		(29,365	)		(163,933	)		(272,293	)
Accounts payable and accrued expenses		12,945			166,471			444,412			363,528			383,630			1,007,458
Due to affiliate		31,194			(37,660	)		(265,466	)		(265,466	)		—			—
Accrued compensation and related expenses		9,300			9,843			118,456			61,516			27,302			164,901

Net cash used in operating activities		(1,701,355	)		(6,755,398	)		(5,931,250	)		(2,756,830	)		(7,005,554	)		(21,369,231	)
Investing activities:
Purchases of marketable securities available-for-sale		—			—			(1,250,000	)		(1,250,000	)		—			(1,250,000	)
Acquisitions of property and equipment		(319,441	)		(17,014	)		(10,537	)		(7,371	)		(149,985	)		(496,977	)
Proceeds from sale of property and equipment		—			—			194,821			194,821			—			194,821

Net cash used in investing activities		(319,441	)		(17,014	)		(1,065,716	)		(1,062,550	)		(149,985	)		(1,552,156	)
Financing activities:
Sales of common stock		—			—			—			—			—			50,000
Sales of preferred stock, net of issuance costs		5,000,000			—			9,656,547			8,307,903			17,156,104			36,812,651
Advances received for the sale of convertible preferred stock		—			—			300,000			—			(300,000	)		—

Net cash provided by financing activities		5,000,000			—			9,956,547			8,307,903			16,856,104			36,862,651

Net increase in cash and cash equivalents		2,979,204			(6,772,412	)		2,959,581			4,488,523			9,700,565			13,941,264
Cash and cash equivalents, beginning of period		5,074,326			8,053,530			1,281,118			1,281,118			4,240,699			—

Cash and cash equivalents, end of period	$	8,053,530		$	1,281,118		$	4,240,699		$	5,769,641		$	13,941,264		$	13,941,264

See accompanying notes.

F-6

MediciNova, Inc.

(a development stage company)

Notes to Financial Statements

(Information as of June 30, 2004 and for the six months ended June 30, 2003 and 2004 and

the period from September 26, 2000 (inception) to June 30, 2004 is unaudited)

1. The Company, Basis of Presentation and Summary of Significant Accounting Policies

The Company

MediciNova, Inc. (“MediciNova” or the “Company”) was incorporated in the state of Delaware in September 2000. The Company was founded as a majority-owned subsidiary of Tanabe Seiyaku Co., Ltd. (together with its affiliates, “Tanabe”) in Japan. As of September 30, 2004, Tanabe owned approximately 15% of the Company. MediciNova is a specialty pharmaceutical company focused on the acquisition, development and commercialization of innovative pharmaceutical products. The Company’s in-licensed compounds and its pipeline, which includes several compounds in clinical testing, target a variety of prevalent medical conditions, including premature labor, cancer and asthma (see Note 5).

Basis of Presentation

The Company’s primary activities since incorporation have been organizational activities, including recruiting personnel, establishing office facilities, conducting research and development, performing business and financial planning and raising capital. Accordingly, the Company is considered to be in the development stage.

The Company has sustained operating losses since inception and expects such losses to continue over the next several years. Management plans to continue financing the operations with a combination of equity issuances and debt arrangements. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs, or cease operations.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, management evaluates their estimates and judgments. Management bases estimates on historical experience and on various other factors that they believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Unaudited Interim Results

The accompanying unaudited interim balance sheet as of June 30, 2004, the statements of operations and cash flows for the six months ended June 30, 2003 and 2004 and the period from September 26, 2000 (inception) to June 30, 2004 and the statement of stockholders’ equity for the six months ended June 30, 2004 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary to present fairly the Company’s financial position as of June 30, 2004 and results of operations and cash flows for the six months ended June 30, 2003 and 2004. The results of operations for the six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004 or for any other interim period or for any other future year.

F-7

MediciNova, Inc.

(a development stage company)

Notes to Financial Statements—(Continued)

(Information as of June 30, 2004 and for the six months ended June 30, 2003 and 2004 and the period from September 26, 2000 (inception) to June 30, 2004 is unaudited)

Unaudited Pro Forma Stockholders’ Equity

The unaudited pro forma stockholders’ equity information in the accompanying balance sheet assumes the conversion of the outstanding shares of convertible preferred stock at June 30, 2004 into 39,115,000 shares of common stock as though the completion of the initial public offering had occurred on June 30, 2004. Common shares issued in such initial public offering and any related estimated net proceeds are excluded from such pro forma information (also see Note 9).

Cash and Cash Equivalents

Cash and cash equivalents consists of cash, and other highly liquid investments with original maturities of three months or less from the date of purchase.

Marketable Securities Available-for-sale

Investments with an original maturity of more than three months are considered short-term investments and have been classified by management as marketable securities available-for-sale. Such investments consist of municipal auction rate securities, with maturities through 2040, and are carried at fair value, with unrealized gains and losses, if material, included as a separate component of stockholders’ equity.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash, cash equivalents and marketable securities available-for-sale. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. However, management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Additionally, the Company has established guidelines regarding diversification of its investment and their maturities, which are designed to maintain safety and liquidity.

Fair Value of Financial Instruments

The Company’s financial instruments including cash and cash equivalents, accounts payable, and accrued liabilities, are carried at cost, which management believes approximates fair value given their short-term nature.

Property and Equipment

Property, which consists of leasehold improvements, and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. The useful life for equipment is five years and leasehold improvements are amortized over the lesser of the useful life or the term of the lease. The Company’s current lease expires in 2008.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment

F-8

MediciNova, Inc.

(a development stage company)

Notes to Financial Statements—(Continued)

(Information as of June 30, 2004 and for the six months ended June 30, 2003 and 2004 and the period from September 26, 2000 (inception) to June 30, 2004 is unaudited)

loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. Impairment, if any, is assessed using discounted cash flows. Through June 30, 2004, there has been no such impairment.

Research and Development

Research and development expenses consist of costs incurred to further the Company’s research and development activities and include salaries and related employee benefits, costs associated with clinical trials, non-clinical activities such as toxicology testing, regulatory activities, research-related overhead expenses, and fees paid to external service providers and contract research organizations who conduct certain research and development activities on behalf of the Company. Research and development costs are expensed as incurred.

Income Taxes

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes, a deferred tax asset or liability is determined based on the difference between the financial statement and the tax basis of assets and liabilities as measured by the enacted tax rates, which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its employee stock options and warrants as permitted by SFAS No. 123, Accounting for Stock-Based Compensation. Under APB Opinion No. 25, if the exercise price of the Company’s employee stock options or warrants is not less than the fair value of the underlying stock on the date of grant, no compensation expense is recognized. In determining the fair value of the common stock, the Board of Directors considered, among other factors, (i) the advancement of the Company’s technology, (ii) the Company’s financial position and (iii) the fair value of the Company’s common stock or preferred stock as determined in arm’s-length transactions.

In connection with the grant of certain stock options to employees during the six months ended June 30, 2004, the Company recorded deferred stock-based compensation within stockholders’ equity of $1,151,500, which represents the difference between the estimated fair value of the common stock and the option exercise price at the date of grant (also see Note 6, “Founders’ Common Stock and Warrants”). Such amount will be amortized over the vesting period of the applicable options on a straight-line basis. The expected future amortization expense for deferred stock-based compensation for stock option grants through June 30, 2004 is as follows:


Six months ending December 31, 2004	$	143,938
2005		287,875